We Think Harbin Electric Corporation Jiamusi Electric MachineLtd (SZSE:000922) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Harbin Electric Corporation Jiamusi Electric Machine CO.,Ltd (SZSE:000922) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Harbin Electric Corporation Jiamusi Electric MachineLtd

What Is Harbin Electric Corporation Jiamusi Electric MachineLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Harbin Electric Corporation Jiamusi Electric MachineLtd had CN¥1.30b of debt, an increase on CN¥231.6m, over one year. But on the other hand it also has CN¥1.86b in cash, leading to a CN¥558.5m net cash position.

How Healthy Is Harbin Electric Corporation Jiamusi Electric MachineLtd's Balance Sheet?

The latest balance sheet data shows that Harbin Electric Corporation Jiamusi Electric MachineLtd had liabilities of CN¥5.49b due within a year, and liabilities of CN¥203.0m falling due after that. On the other hand, it had cash of CN¥1.86b and CN¥3.05b worth of receivables due within a year. So it has liabilities totalling CN¥787.4m more than its cash and near-term receivables, combined.

Given Harbin Electric Corporation Jiamusi Electric MachineLtd has a market capitalization of CN¥5.54b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Harbin Electric Corporation Jiamusi Electric MachineLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Harbin Electric Corporation Jiamusi Electric MachineLtd saw its EBIT drop by 5.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Harbin Electric Corporation Jiamusi Electric MachineLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Harbin Electric Corporation Jiamusi Electric MachineLtd 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. In the last three years, Harbin Electric Corporation Jiamusi Electric MachineLtd's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Harbin Electric Corporation Jiamusi Electric MachineLtd does have more liabilities than liquid assets, it also has net cash of CN¥558.5m. So we are not troubled with Harbin Electric Corporation Jiamusi Electric MachineLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Harbin Electric Corporation Jiamusi Electric MachineLtd has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.