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 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. We note that Hangzhou Heatwell Electric Heating Technology Co., Ltd. (SHSE:603075) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Hangzhou Heatwell Electric Heating Technology Carry?
As you can see below, Hangzhou Heatwell Electric Heating Technology had CN¥346.4m of debt at September 2023, down from CN¥462.4m a year prior. But it also has CN¥925.4m in cash to offset that, meaning it has CN¥579.0m net cash.
A Look At Hangzhou Heatwell Electric Heating Technology's Liabilities
The latest balance sheet data shows that Hangzhou Heatwell Electric Heating Technology had liabilities of CN¥833.7m due within a year, and liabilities of CN¥31.3m falling due after that. Offsetting this, it had CN¥925.4m in cash and CN¥522.5m in receivables that were due within 12 months. So it actually has CN¥582.9m more liquid assets than total liabilities.
This surplus suggests that Hangzhou Heatwell Electric Heating Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 9.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Hangzhou Heatwell Electric Heating Technology's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept 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 20% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
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¥579.0m, as well as more liquid assets than liabilities. And it also grew its EBIT by 9.4% over the last year. So we are not troubled with Hangzhou Heatwell Electric Heating Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Hangzhou Heatwell Electric Heating Technology, you may well want to click here to check an interactive graph of its earnings per share history.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.