Does Harbin Dongan Auto EngineLtd (SHSE:600178) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Harbin Dongan Auto Engine Co.,Ltd (SHSE:600178) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Dongan Auto EngineLtd

What Is Harbin Dongan Auto EngineLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Harbin Dongan Auto EngineLtd had debt of CN¥502.7m, up from CN¥340.2m in one year. But it also has CN¥1.29b in cash to offset that, meaning it has CN¥785.1m net cash.

A Look At Harbin Dongan Auto EngineLtd's Liabilities

According to the last reported balance sheet, Harbin Dongan Auto EngineLtd had liabilities of CN¥3.93b due within 12 months, and liabilities of CN¥142.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.29b as well as receivables valued at CN¥1.98b due within 12 months. So it has liabilities totalling CN¥799.0m more than its cash and near-term receivables, combined.

Given Harbin Dongan Auto EngineLtd has a market capitalization of CN¥5.54b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Harbin Dongan Auto EngineLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Harbin Dongan Auto EngineLtd'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.

In the last year Harbin Dongan Auto EngineLtd had a loss before interest and tax, and actually shrunk its revenue by 7.7%, to CN¥4.5b. That's not what we would hope to see.

So How Risky Is Harbin Dongan Auto EngineLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Harbin Dongan Auto EngineLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥717m of cash and made a loss of CN¥27m. Given it only has net cash of CN¥785.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 1 warning sign with Harbin Dongan Auto EngineLtd , and understanding them should be part of your investment process.

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.