Jiangsu Hengli HydraulicLtd (SHSE:601100) Could Easily Take On More Debt

Warren Buffett famously said, '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, Jiangsu Hengli Hydraulic Co.,Ltd (SHSE:601100) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Jiangsu Hengli HydraulicLtd

What Is Jiangsu Hengli HydraulicLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Hengli HydraulicLtd had CN¥99.5m of debt in September 2024, down from CN¥253.5m, one year before. 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?

According to the last reported balance sheet, Jiangsu Hengli HydraulicLtd had liabilities of CN¥3.81b due within 12 months, and liabilities of CN¥384.4m due beyond 12 months. 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!

Also good is that Jiangsu Hengli HydraulicLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Jiangsu Hengli HydraulicLtd's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Hengli HydraulicLtd has net cash of CN¥7.95b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So is Jiangsu Hengli HydraulicLtd'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. Be aware that Jiangsu Hengli HydraulicLtd is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.