These 4 Measures Indicate That Hoymiles Power Electronics (SHSE:688032) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Hoymiles Power Electronics Inc. (SHSE:688032) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hoymiles Power Electronics

How Much Debt Does Hoymiles Power Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hoymiles Power Electronics had CN¥42.3m of debt, an increase on none, over one year. However, it does have CN¥4.76b in cash offsetting this, leading to net cash of CN¥4.72b.

How Healthy Is Hoymiles Power Electronics' Balance Sheet?

The latest balance sheet data shows that Hoymiles Power Electronics had liabilities of CN¥843.1m due within a year, and liabilities of CN¥103.1m falling due after that. Offsetting these obligations, it had cash of CN¥4.76b as well as receivables valued at CN¥478.5m due within 12 months. So it can boast CN¥4.30b more liquid assets than total liabilities.

This excess liquidity suggests that Hoymiles Power Electronics is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face 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!

The modesty of its debt load may become crucial for Hoymiles Power Electronics if management cannot prevent a repeat of the 56% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, Hoymiles Power Electronics saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hoymiles Power Electronics has CN¥4.72b in net cash and a decent-looking balance sheet. So we don't have any problem with Hoymiles Power Electronics's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Hoymiles Power Electronics has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.