Hsino Tower Group (SHSE:601096) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Hsino Tower Group Co., Ltd. (SHSE:601096) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hsino Tower Group

How Much Debt Does Hsino Tower Group Carry?

The image below, which you can click on for greater detail, shows that Hsino Tower Group had debt of CN¥556.1m at the end of March 2024, a reduction from CN¥1.48b over a year. However, it does have CN¥1.30b in cash offsetting this, leading to net cash of CN¥746.0m.

How Healthy Is Hsino Tower Group's Balance Sheet?

According to the last reported balance sheet, Hsino Tower Group had liabilities of CN¥4.80b due within 12 months, and liabilities of CN¥134.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.30b as well as receivables valued at CN¥3.79b due within 12 months. So it actually has CN¥160.2m more liquid assets than total liabilities.

This state of affairs indicates that Hsino Tower Group'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¥12.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Hsino Tower Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Hsino Tower Group's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hsino Tower Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hsino Tower Group 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. Over the last three years, Hsino Tower Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hsino Tower Group has CN¥746.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥742m, being 243% of its EBIT. So we are not troubled with Hsino Tower Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Hsino Tower Group has 1 warning sign we think 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.