Does Huaming Power EquipmentLtd (SZSE:002270) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Huaming Power Equipment Co.,Ltd (SZSE:002270) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Huaming Power EquipmentLtd

What Is Huaming Power EquipmentLtd's Debt?

As you can see below, Huaming Power EquipmentLtd had CN¥336.9m of debt at March 2024, down from CN¥409.2m a year prior. However, it does have CN¥1.24b in cash offsetting this, leading to net cash of CN¥905.2m.

How Healthy Is Huaming Power EquipmentLtd's Balance Sheet?

We can see from the most recent balance sheet that Huaming Power EquipmentLtd had liabilities of CN¥771.4m falling due within a year, and liabilities of CN¥391.6m due beyond that. Offsetting this, it had CN¥1.24b in cash and CN¥1.31b in receivables that were due within 12 months. So it can boast CN¥1.39b more liquid assets than total liabilities.

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

On top of that, Huaming Power EquipmentLtd grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 Huaming Power EquipmentLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Huaming Power EquipmentLtd 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, Huaming Power EquipmentLtd recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Huaming Power EquipmentLtd has net cash of CN¥905.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥742m, being 96% of its EBIT. So we don't think Huaming Power EquipmentLtd's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Huaming Power EquipmentLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.