Does Himile Mechanical Science and Technology (Shandong) (SZSE:002595) Have A Healthy Balance Sheet?

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.' 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. We note that Himile Mechanical Science and Technology (Shandong) Co., Ltd (SZSE:002595) 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Himile Mechanical Science and Technology (Shandong)

What Is Himile Mechanical Science and Technology (Shandong)'s Debt?

The image below, which you can click on for greater detail, shows that Himile Mechanical Science and Technology (Shandong) had debt of CN¥41.8m at the end of December 2023, a reduction from CN¥129.8m over a year. But on the other hand it also has CN¥1.76b in cash, leading to a CN¥1.72b net cash position.

How Strong Is Himile Mechanical Science and Technology (Shandong)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Himile Mechanical Science and Technology (Shandong) had liabilities of CN¥1.08b due within 12 months and liabilities of CN¥217.9m due beyond that. Offsetting this, it had CN¥1.76b in cash and CN¥3.35b in receivables that were due within 12 months. So it can boast CN¥3.82b more liquid assets than total liabilities.

This surplus suggests that Himile Mechanical Science and Technology (Shandong) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Himile Mechanical Science and Technology (Shandong) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Himile Mechanical Science and Technology (Shandong) has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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 Himile Mechanical Science and Technology (Shandong)'s ability to maintain a healthy balance sheet going forward. 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. While Himile Mechanical Science and Technology (Shandong) 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. In the last three years, Himile Mechanical Science and Technology (Shandong)'s free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Himile Mechanical Science and Technology (Shandong) has net cash of CN¥1.72b, as well as more liquid assets than liabilities. And we liked the look of last year's 41% year-on-year EBIT growth. So we don't think Himile Mechanical Science and Technology (Shandong)'s use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Himile Mechanical Science and Technology (Shandong) that you should be aware of before investing here.

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.