Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hisense Home Appliances Group Co., Ltd. (SZSE:000921) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Hisense Home Appliances Group's Net Debt?

As you can see below, Hisense Home Appliances Group had CN¥2.96b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥25.0b in cash to offset that, meaning it has CN¥22.0b net cash.

How Healthy Is Hisense Home Appliances Group's Balance Sheet?

We can see from the most recent balance sheet that Hisense Home Appliances Group had liabilities of CN¥47.8b falling due within a year, and liabilities of CN¥2.47b due beyond that. Offsetting these obligations, it had cash of CN¥25.0b as well as receivables valued at CN¥17.2b due within 12 months. So it has liabilities totalling CN¥8.05b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hisense Home Appliances Group has a market capitalization of CN¥37.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Hisense Home Appliances Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Hisense Home Appliances Group's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Hisense Home Appliances Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hisense Home Appliances Group 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. Over the last three years, Hisense Home Appliances Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Hisense Home Appliances Group does have more liabilities than liquid assets, it also has net cash of CN¥22.0b. And it impressed us with free cash flow of CN¥5.7b, being 163% of its EBIT. So we don't think Hisense Home Appliances Group's use of debt is risky. 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. We've identified 1 warning sign with Hisense Home Appliances Group , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.