Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Hoymiles Power Electronics Inc. (SHSE:688032) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hoymiles Power Electronics's Debt?

As you can see below, at the end of March 2024, Hoymiles Power Electronics had CN¥42.3m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥4.76b in cash offsetting this, leading to net cash of CN¥4.72b.

How Strong Is Hoymiles Power Electronics' Balance Sheet?

The latest balance sheet data shows that Hoymiles Power Electronics had liabilities of CN¥843.1m due within a year, and liabilities of CN¥103.1m falling due after that. Offsetting this, it had CN¥4.76b in cash and CN¥478.5m in receivables that were due within 12 months. So it actually has CN¥4.30b more liquid assets than total liabilities.

This surplus suggests that Hoymiles Power Electronics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Hoymiles Power Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Hoymiles Power Electronics's saving grace is its low debt levels, because its EBIT has tanked 56% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hoymiles Power Electronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hoymiles Power Electronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hoymiles Power Electronics burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hoymiles Power Electronics has net cash of CN¥4.72b, as well as more liquid assets than liabilities. So we are not troubled with Hoymiles Power Electronics's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Hoymiles Power Electronics you should be aware of, and 2 of them are potentially serious.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.