Shanghai Hanbell Precise Machinery (SZSE:002158) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Shanghai Hanbell Precise Machinery Co., Ltd. (SZSE:002158) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Hanbell Precise Machinery

What Is Shanghai Hanbell Precise Machinery's Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai Hanbell Precise Machinery had debt of CN¥940.6m at the end of June 2024, a reduction from CN¥1.04b over a year. But it also has CN¥2.24b in cash to offset that, meaning it has CN¥1.30b net cash.

How Healthy Is Shanghai Hanbell Precise Machinery's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Hanbell Precise Machinery had liabilities of CN¥2.25b falling due within a year, and liabilities of CN¥191.4m due beyond that. Offsetting these obligations, it had cash of CN¥2.24b as well as receivables valued at CN¥1.04b due within 12 months. So it can boast CN¥841.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Hanbell Precise Machinery could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Hanbell Precise Machinery boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Shanghai Hanbell Precise Machinery grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Hanbell Precise Machinery 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, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Hanbell Precise Machinery 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 most recent three years, Shanghai Hanbell Precise Machinery recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Hanbell Precise Machinery has net cash of CN¥1.30b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 22% over the last year. So is Shanghai Hanbell Precise Machinery's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Shanghai Hanbell Precise Machinery that 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.

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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.