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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Henan Pinggao Electric Co.,Ltd. (SHSE:600312) does carry debt. But should shareholders be worried about its use of debt?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Henan Pinggao ElectricLtd

What Is Henan Pinggao ElectricLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Henan Pinggao ElectricLtd had debt of CN¥172.1m at the end of March 2024, a reduction from CN¥314.1m over a year. However, its balance sheet shows it holds CN¥5.07b in cash, so it actually has CN¥4.90b net cash.

How Strong Is Henan Pinggao ElectricLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Henan Pinggao ElectricLtd had liabilities of CN¥9.50b due within 12 months and liabilities of CN¥157.4m due beyond that. Offsetting these obligations, it had cash of CN¥5.07b as well as receivables valued at CN¥7.54b due within 12 months. So it actually has CN¥2.96b more liquid assets than total liabilities.

This short term liquidity is a sign that Henan Pinggao ElectricLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Henan Pinggao ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Henan Pinggao ElectricLtd grew its EBIT by 148% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Henan Pinggao ElectricLtd 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. Happily for any shareholders, Henan Pinggao ElectricLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Henan Pinggao ElectricLtd has CN¥4.90b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.5b, being 288% of its EBIT. So is Henan Pinggao ElectricLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Henan Pinggao ElectricLtd you should be aware of.

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.