We Think Hoymiles Power Electronics (SHSE:688032) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hoymiles Power Electronics

What Is Hoymiles Power Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hoymiles Power Electronics had CN¥646.2m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥4.35b in cash, so it actually has CN¥3.70b net cash.

How Healthy 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 can boast 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. 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!

In fact Hoymiles Power Electronics's saving grace is its low debt levels, because its EBIT has tanked 56% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hoymiles Power Electronics's ability to maintain a healthy balance sheet going forward. 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. While Hoymiles Power Electronics 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, 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¥3.70b 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Hoymiles Power Electronics (2 are a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.