Hsino Tower Group (SHSE:601096) Has A Rock Solid 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Hsino Tower Group Co., Ltd. (SHSE:601096) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hsino Tower Group

What Is Hsino Tower Group's Net Debt?

The image below, which you can click on for greater detail, shows that Hsino Tower Group had debt of CN¥685.3m at the end of September 2024, a reduction from CN¥1.11b over a year. But on the other hand it also has CN¥1.71b in cash, leading to a CN¥1.03b net cash position.

How Healthy Is Hsino Tower Group's Balance Sheet?

We can see from the most recent balance sheet that Hsino Tower Group had liabilities of CN¥5.16b falling due within a year, and liabilities of CN¥24.7m due beyond that. On the other hand, it had cash of CN¥1.71b and CN¥3.72b worth of receivables due within a year. So it actually has CN¥251.9m more liquid assets than total liabilities.

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

On top of that, Hsino Tower Group grew its EBIT by 62% 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 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. Happily for any shareholders, Hsino Tower Group 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 we empathize with investors who find debt concerning, you should keep in mind that Hsino Tower Group has net cash of CN¥1.03b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥746m, being 263% of its EBIT. So we don't think Hsino Tower Group's use of debt is risky. 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. Be aware that Hsino Tower Group is showing 1 warning sign in our investment analysis , you should know about...

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.