Does Huizhou Desay SV Automotive (SZSE:002920) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Huizhou Desay SV Automotive Co., Ltd. (SZSE:002920) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Huizhou Desay SV Automotive

What Is Huizhou Desay SV Automotive's Debt?

You can click the graphic below for the historical numbers, but it shows that Huizhou Desay SV Automotive had CN¥1.08b of debt in March 2024, down from CN¥1.35b, one year before. However, its balance sheet shows it holds CN¥1.09b in cash, so it actually has CN¥12.5m net cash.

How Strong Is Huizhou Desay SV Automotive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Huizhou Desay SV Automotive had liabilities of CN¥8.78b due within 12 months and liabilities of CN¥1.23b due beyond that. Offsetting this, it had CN¥1.09b in cash and CN¥8.49b in receivables that were due within 12 months. So it has liabilities totalling CN¥429.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Huizhou Desay SV Automotive's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥61.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Huizhou Desay SV Automotive also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Huizhou Desay SV Automotive grew its EBIT by 45% 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 it is future earnings, more than anything, that will determine Huizhou Desay SV Automotive'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Huizhou Desay SV Automotive 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. Considering the last three years, Huizhou Desay SV Automotive actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Huizhou Desay SV Automotive's liabilities, but we can be reassured by the fact it has has net cash of CN¥12.5m. And we liked the look of last year's 45% year-on-year EBIT growth. So we are not troubled with Huizhou Desay SV Automotive's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Huizhou Desay SV Automotive (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.