The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Hangzhou Robam Appliances Co., Ltd. (SZSE:002508) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hangzhou Robam Appliances

What Is Hangzhou Robam Appliances's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Hangzhou Robam Appliances had CN¥101.9m of debt, an increase on CN¥66.1m, over one year. But it also has CN¥8.55b in cash to offset that, meaning it has CN¥8.45b net cash.

A Look At Hangzhou Robam Appliances' Liabilities

The latest balance sheet data shows that Hangzhou Robam Appliances had liabilities of CN¥5.05b due within a year, and liabilities of CN¥148.9m falling due after that. Offsetting these obligations, it had cash of CN¥8.55b as well as receivables valued at CN¥2.81b due within 12 months. So it can boast CN¥6.16b more liquid assets than total liabilities.

This surplus strongly suggests that Hangzhou Robam Appliances has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hangzhou Robam Appliances boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Hangzhou Robam Appliances has increased its EBIT by 8.3% over twelve months, which should ease any concerns about debt repayment. 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 Hangzhou Robam Appliances'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. While Hangzhou Robam Appliances 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. Over the last three years, Hangzhou Robam Appliances recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Robam Appliances has net cash of CN¥8.45b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.8b, being 88% of its EBIT. So we don't think Hangzhou Robam Appliances's use of debt is risky. 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 1 warning sign for Hangzhou Robam Appliances you should be aware of.

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.

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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.