We Think Henan Pinggao ElectricLtd (SHSE:600312) Can Manage Its Debt With Ease

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 Henan Pinggao Electric Co.,Ltd. (SHSE:600312) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Henan Pinggao ElectricLtd

How Much Debt Does Henan Pinggao ElectricLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Henan Pinggao ElectricLtd had CN¥261.6m of debt in September 2023, down from CN¥421.1m, one year before. But it also has CN¥3.55b in cash to offset that, meaning it has CN¥3.29b net cash.

A Look At Henan Pinggao ElectricLtd's Liabilities

We can see from the most recent balance sheet that Henan Pinggao ElectricLtd had liabilities of CN¥9.27b falling due within a year, and liabilities of CN¥175.6m due beyond that. Offsetting these obligations, it had cash of CN¥3.55b as well as receivables valued at CN¥7.91b due within 12 months. So it can boast CN¥2.02b more liquid assets than total liabilities.

This surplus suggests that Henan Pinggao ElectricLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Henan Pinggao ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Henan Pinggao ElectricLtd grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Henan Pinggao ElectricLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Henan Pinggao ElectricLtd 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. Happily for any shareholders, Henan Pinggao ElectricLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Henan Pinggao ElectricLtd has net cash of CN¥3.29b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 352% of its EBIT. So is Henan Pinggao ElectricLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Henan Pinggao ElectricLtd's earnings per share history for free.

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.