We Think Shenzhen Hopewind Electric (SHSE:603063) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Shenzhen Hopewind Electric Co., Ltd. (SHSE:603063) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Hopewind Electric

What Is Shenzhen Hopewind Electric's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Hopewind Electric had debt of CN¥751.5m, up from CN¥645.4m in one year. But it also has CN¥1.36b in cash to offset that, meaning it has CN¥612.3m net cash.

How Healthy Is Shenzhen Hopewind Electric's Balance Sheet?

The latest balance sheet data shows that Shenzhen Hopewind Electric had liabilities of CN¥2.17b due within a year, and liabilities of CN¥1.15b falling due after that. Offsetting these obligations, it had cash of CN¥1.36b as well as receivables valued at CN¥2.60b due within 12 months. So it actually has CN¥635.8m more liquid assets than total liabilities.

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

On the other hand, Shenzhen Hopewind Electric's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Hopewind Electric can strengthen its balance sheet over time. 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. While Shenzhen Hopewind Electric 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. 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 it is always sensible to investigate a company's debt, in this case Shenzhen Hopewind Electric has CN¥612.3m in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhen Hopewind Electric's debt use. 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. Case in point: We've spotted 2 warning signs for Shenzhen Hopewind Electric you should be aware of, and 1 of them is a bit concerning.

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.