These 4 Measures Indicate That Huadian Heavy Industries (SHSE:601226) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Huadian Heavy Industries Co., Ltd. (SHSE:601226) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Huadian Heavy Industries

What Is Huadian Heavy Industries's Debt?

As you can see below, Huadian Heavy Industries had CN¥26.0m of debt at September 2024, down from CN¥129.5m a year prior. However, its balance sheet shows it holds CN¥1.79b in cash, so it actually has CN¥1.76b net cash.

How Strong Is Huadian Heavy Industries' Balance Sheet?

The latest balance sheet data shows that Huadian Heavy Industries had liabilities of CN¥6.52b due within a year, and liabilities of CN¥36.5m falling due after that. On the other hand, it had cash of CN¥1.79b and CN¥5.24b worth of receivables due within a year. So it actually has CN¥474.4m more liquid assets than total liabilities.

This surplus suggests that Huadian Heavy Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Huadian Heavy Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Huadian Heavy Industries's load is not too heavy, because its EBIT was down 46% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Huadian Heavy Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Huadian Heavy Industries 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. During the last three years, Huadian Heavy Industries produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Huadian Heavy Industries has CN¥1.76b in net cash and a decent-looking balance sheet. So we don't have any problem with Huadian Heavy Industries's use of debt. 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. We've identified 1 warning sign with Huadian Heavy Industries , and understanding them should be part of your investment process.

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.