Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Guangdong KinLong Hardware Products Co.,Ltd. (SZSE:002791) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Guangdong KinLong Hardware ProductsLtd Carry?
As you can see below, Guangdong KinLong Hardware ProductsLtd had CN¥376.0m of debt at March 2024, down from CN¥756.4m a year prior. But it also has CN¥781.1m in cash to offset that, meaning it has CN¥405.1m net cash.
How Healthy Is Guangdong KinLong Hardware ProductsLtd's Balance Sheet?
The latest balance sheet data shows that Guangdong KinLong Hardware ProductsLtd had liabilities of CN¥3.37b due within a year, and liabilities of CN¥325.3m falling due after that. On the other hand, it had cash of CN¥781.1m and CN¥3.91b worth of receivables due within a year. So it actually has CN¥994.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Guangdong KinLong Hardware ProductsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guangdong KinLong Hardware ProductsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Guangdong KinLong Hardware ProductsLtd grew its EBIT by 136% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guangdong KinLong Hardware ProductsLtd can strengthen its balance sheet over time. 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. While Guangdong KinLong Hardware ProductsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Guangdong KinLong Hardware ProductsLtd produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Guangdong KinLong Hardware ProductsLtd has net cash of CN¥405.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 136% over the last year. So is Guangdong KinLong Hardware ProductsLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Guangdong KinLong Hardware ProductsLtd's earnings per share history for free.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
