Here's Why Shenzhen Hopewind Electric (SHSE:603063) Can Manage Its Debt Responsibly

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.' 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 Shenzhen Hopewind Electric Co., Ltd. (SHSE:603063) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shenzhen Hopewind Electric

What Is Shenzhen Hopewind Electric's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shenzhen Hopewind Electric had CN¥905.5m of debt, an increase on CN¥554.7m, over one year. But on the other hand it also has CN¥1.44b in cash, leading to a CN¥534.5m net cash position.

How Strong Is Shenzhen Hopewind Electric's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Hopewind Electric had liabilities of CN¥2.18b due within 12 months and liabilities of CN¥1.12b due beyond that. On the other hand, it had cash of CN¥1.44b and CN¥2.45b worth of receivables due within a year. So it can boast CN¥590.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Hopewind Electric could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shenzhen Hopewind Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Shenzhen Hopewind Electric has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Hopewind Electric'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen Hopewind Electric 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. Considering the last three years, Shenzhen Hopewind Electric actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Hopewind Electric has net cash of CN¥534.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So we don't have any problem with Shenzhen Hopewind Electric'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 Shenzhen Hopewind Electric , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.