We Think Jiangsu Hengli HydraulicLtd (SHSE:601100) Can Stay On Top Of Its Debt

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. As with many other companies Jiangsu Hengli Hydraulic Co.,Ltd (SHSE:601100) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Hengli HydraulicLtd had CN¥253.5m of debt in September 2023, down from CN¥429.7m, one year before. However, it does have CN¥8.01b in cash offsetting this, leading to net cash of CN¥7.75b.

How Healthy Is Jiangsu Hengli HydraulicLtd's Balance Sheet?

The latest balance sheet data shows that Jiangsu Hengli HydraulicLtd had liabilities of CN¥3.68b due within a year, and liabilities of CN¥367.7m falling due after that. On the other hand, it had cash of CN¥8.01b and CN¥3.12b worth of receivables due within a year. So it actually has CN¥7.08b 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!

On the other hand, Jiangsu Hengli HydraulicLtd saw its EBIT drop by 7.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu Hengli HydraulicLtd 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 most recent three years, Jiangsu Hengli HydraulicLtd recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥7.75b, as well as more liquid assets than liabilities. So is Jiangsu Hengli HydraulicLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Jiangsu Hengli HydraulicLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

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.