Here's Why Hangzhou Kelin Electric (SHSE:688611) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Hangzhou Kelin Electric Co., Ltd. (SHSE:688611) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Hangzhou Kelin Electric

What Is Hangzhou Kelin Electric's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hangzhou Kelin Electric had debt of CN¥22.0m, up from none in one year. However, it does have CN¥265.6m in cash offsetting this, leading to net cash of CN¥243.6m.

How Strong Is Hangzhou Kelin Electric's Balance Sheet?

We can see from the most recent balance sheet that Hangzhou Kelin Electric had liabilities of CN¥148.9m falling due within a year, and liabilities of CN¥7.91m due beyond that. On the other hand, it had cash of CN¥265.6m and CN¥139.4m worth of receivables due within a year. So it actually has CN¥248.2m more liquid assets than total liabilities.

This surplus suggests that Hangzhou Kelin Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hangzhou Kelin Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hangzhou Kelin Electric grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hangzhou Kelin Electric's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hangzhou Kelin Electric 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, Hangzhou Kelin Electric saw substantial negative free cash flow, in total. 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 Hangzhou Kelin Electric has CN¥243.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 58% over the last year. So we are not troubled with Hangzhou Kelin Electric's debt use. 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 example, we've discovered 3 warning signs for Hangzhou Kelin Electric (2 are a bit unpleasant!) that you should be aware of before investing here.

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.