David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hangzhou Heatwell Electric Heating Technology Co., Ltd. (SHSE:603075) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Hangzhou Heatwell Electric Heating Technology's Net Debt?
As you can see below, at the end of June 2024, Hangzhou Heatwell Electric Heating Technology had CN¥370.2m of debt, up from CN¥346.4m a year ago. Click the image for more detail. However, it does have CN¥758.1m in cash offsetting this, leading to net cash of CN¥388.0m.
How Healthy Is Hangzhou Heatwell Electric Heating Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hangzhou Heatwell Electric Heating Technology had liabilities of CN¥819.1m due within 12 months and liabilities of CN¥14.2m due beyond that. Offsetting these obligations, it had cash of CN¥758.1m as well as receivables valued at CN¥631.9m due within 12 months. So it can boast CN¥556.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Hangzhou Heatwell Electric Heating Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hangzhou Heatwell Electric Heating Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Hangzhou Heatwell Electric Heating Technology grew its EBIT by 4.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hangzhou Heatwell Electric Heating Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hangzhou Heatwell Electric Heating Technology 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. Looking at the most recent three years, Hangzhou Heatwell Electric Heating Technology recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Heatwell Electric Heating Technology has net cash of CN¥388.0m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 4.2% in the last twelve months. So we are not troubled with Hangzhou Heatwell Electric Heating Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Hangzhou Heatwell Electric Heating Technology that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
