Hoymiles Power Electronics (SHSE:688032) Has A Pretty 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hoymiles Power Electronics Inc. (SHSE:688032) does use debt in its business. But should shareholders be worried about its use of debt?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hoymiles Power Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hoymiles Power Electronics had CN¥666.5m of debt, an increase on CN¥36.8m, over one year. But on the other hand it also has CN¥4.35b in cash, leading to a CN¥3.68b net cash position.

How Strong Is Hoymiles Power Electronics' Balance Sheet?

The latest balance sheet data shows that Hoymiles Power Electronics had liabilities of CN¥1.48b due within a year, and liabilities of CN¥384.8m falling due after that. On the other hand, it had cash of CN¥4.35b and CN¥638.9m worth of receivables due within a year. So it actually has CN¥3.12b more liquid assets than total liabilities.

It's good to see that Hoymiles Power Electronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hoymiles Power Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Hoymiles Power Electronics

But the other side of the story is that Hoymiles Power Electronics saw its EBIT decline by 6.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hoymiles Power Electronics 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hoymiles Power Electronics 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. During the last three years, Hoymiles Power Electronics burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hoymiles Power Electronics has CN¥3.68b in net cash and a decent-looking balance sheet. So we don't have any problem with Hoymiles Power Electronics's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Hoymiles Power Electronics has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.