Hsino Tower Group (SHSE:601096) Could Easily Take On More Debt

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. Importantly, Hsino Tower Group Co., Ltd. (SHSE:601096) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hsino Tower Group

What Is Hsino Tower Group's Debt?

The image below, which you can click on for greater detail, shows that Hsino Tower Group had debt of CN¥615.0m at the end of June 2024, a reduction from CN¥1.11b over a year. But on the other hand it also has CN¥1.66b in cash, leading to a CN¥1.04b net cash position.

How Strong Is Hsino Tower Group's Balance Sheet?

We can see from the most recent balance sheet that Hsino Tower Group had liabilities of CN¥5.08b falling due within a year, and liabilities of CN¥125.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.66b as well as receivables valued at CN¥3.89b due within 12 months. So it can boast CN¥333.9m more liquid assets than total liabilities.

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

The good news is that Hsino Tower Group has increased its EBIT by 3.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Hsino Tower Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hsino Tower Group 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. Over the last three years, Hsino Tower Group actually produced more free cash flow than EBIT. 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 Hsino Tower Group has CN¥1.04b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥894m, being 288% of its EBIT. So is Hsino Tower Group's debt a risk? It doesn't seem so to us. 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. For example - Hsino Tower Group has 1 warning sign we think you should be aware of.

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.