Does Hengdian Group Tospo Lighting (SHSE:603303) Have A Healthy Balance Sheet?

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. As with many other companies Hengdian Group Tospo Lighting Co., Ltd. (SHSE:603303) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hengdian Group Tospo Lighting

How Much Debt Does Hengdian Group Tospo Lighting Carry?

As you can see below, at the end of September 2024, Hengdian Group Tospo Lighting had CN¥20.0m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥3.46b in cash to offset that, meaning it has CN¥3.44b net cash.

A Look At Hengdian Group Tospo Lighting's Liabilities

According to the last reported balance sheet, Hengdian Group Tospo Lighting had liabilities of CN¥3.14b due within 12 months, and liabilities of CN¥23.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.46b as well as receivables valued at CN¥1.40b due within 12 months. So it actually has CN¥1.69b more liquid assets than total liabilities.

This excess liquidity suggests that Hengdian Group Tospo Lighting is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Hengdian Group Tospo Lighting has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Hengdian Group Tospo Lighting has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hengdian Group Tospo Lighting 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 Hengdian Group Tospo Lighting 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 last three years, Hengdian Group Tospo Lighting actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hengdian Group Tospo Lighting has net cash of CN¥3.44b, as well as more liquid assets than liabilities. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in CN¥77m. So is Hengdian Group Tospo Lighting'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hengdian Group Tospo Lighting you should know about.

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.