Is Jiangsu Hengli HydraulicLtd (SHSE:601100) A Risky Investment?

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. We can see that Jiangsu Hengli Hydraulic Co.,Ltd (SHSE:601100) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jiangsu Hengli HydraulicLtd

What Is Jiangsu Hengli HydraulicLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Jiangsu Hengli HydraulicLtd had debt of CN¥99.5m at the end of September 2024, a reduction from CN¥253.5m over a year. However, it does have CN¥8.05b in cash offsetting this, leading to net cash of CN¥7.95b.

How Healthy Is Jiangsu Hengli HydraulicLtd's Balance Sheet?

The latest balance sheet data shows that Jiangsu Hengli HydraulicLtd had liabilities of CN¥3.81b due within a year, and liabilities of CN¥384.4m falling due after that. On the other hand, it had cash of CN¥8.05b and CN¥3.47b worth of receivables due within a year. So it can boast CN¥7.32b more liquid assets than total liabilities.

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

And we also note warmly that Jiangsu Hengli HydraulicLtd grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jiangsu Hengli HydraulicLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jiangsu Hengli HydraulicLtd 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. Looking at the most recent three years, Jiangsu Hengli HydraulicLtd recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Hengli HydraulicLtd has CN¥7.95b in net cash and a decent-looking balance sheet. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't think Jiangsu Hengli HydraulicLtd'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. To that end, you should learn about the 2 warning signs we've spotted with Jiangsu Hengli HydraulicLtd (including 1 which makes us a bit uncomfortable) .

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.