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.' 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 note that Harbin Electric Corporation Jiamusi Electric Machine CO.,Ltd (SZSE:000922) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Harbin Electric Corporation Jiamusi Electric MachineLtd

What Is Harbin Electric Corporation Jiamusi Electric MachineLtd's Net Debt?

As you can see below, at the end of September 2023, Harbin Electric Corporation Jiamusi Electric MachineLtd had CN¥237.1m of debt, up from CN¥53.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.78b in cash, so it actually has CN¥1.54b net cash.

How Healthy Is Harbin Electric Corporation Jiamusi Electric MachineLtd's Balance Sheet?

The latest balance sheet data shows that Harbin Electric Corporation Jiamusi Electric MachineLtd had liabilities of CN¥2.96b due within a year, and liabilities of CN¥58.8m falling due after that. Offsetting this, it had CN¥1.78b in cash and CN¥2.36b in receivables that were due within 12 months. So it actually has CN¥1.12b more liquid assets than total liabilities.

It's good to see that Harbin Electric Corporation Jiamusi Electric MachineLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Harbin Electric Corporation Jiamusi Electric MachineLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Harbin Electric Corporation Jiamusi Electric MachineLtd grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Harbin Electric Corporation Jiamusi Electric MachineLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Harbin Electric Corporation Jiamusi Electric MachineLtd 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, Harbin Electric Corporation Jiamusi Electric MachineLtd produced sturdy free cash flow equating to 55% 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 it is always sensible to investigate a company's debt, in this case Harbin Electric Corporation Jiamusi Electric MachineLtd has CN¥1.54b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 44% over the last year. So we don't think Harbin Electric Corporation Jiamusi Electric MachineLtd'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. We've identified 2 warning signs with Harbin Electric Corporation Jiamusi Electric MachineLtd (at least 1 which makes us a bit uncomfortable) , 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.