Is Hengdian Group Tospo Lighting (SHSE:603303) Using Too Much Debt?

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. Importantly, Hengdian Group Tospo Lighting Co., Ltd. (SHSE:603303) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hengdian Group Tospo Lighting

What Is Hengdian Group Tospo Lighting's Net Debt?

As you can see below, at the end of December 2023, Hengdian Group Tospo Lighting had CN¥20.0m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥2.49b in cash offsetting this, leading to net cash of CN¥2.47b.

How Strong Is Hengdian Group Tospo Lighting's Balance Sheet?

According to the last reported balance sheet, Hengdian Group Tospo Lighting had liabilities of CN¥2.01b due within 12 months, and liabilities of CN¥33.4m due beyond 12 months. On the other hand, it had cash of CN¥2.49b and CN¥1.28b worth of receivables due within a year. So it can boast CN¥1.72b more liquid assets than total liabilities.

This surplus suggests that Hengdian Group Tospo Lighting is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Hengdian Group Tospo Lighting boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Hengdian Group Tospo Lighting grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hengdian Group Tospo Lighting'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 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥2.47b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥676m, being 160% of its EBIT. So we don't think Hengdian Group Tospo Lighting's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Hengdian Group Tospo Lighting .

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.