Himile Mechanical Science and Technology (Shandong) (SZSE:002595) Has A Rock Solid Balance Sheet

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 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. We can see that Himile Mechanical Science and Technology (Shandong) Co., Ltd (SZSE:002595) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

As you can see below, at the end of March 2024, Himile Mechanical Science and Technology (Shandong) had CN¥65.7m of debt, up from CN¥31.3m a year ago. Click the image for more detail. But it also has CN¥1.79b in cash to offset that, meaning it has CN¥1.73b net cash.

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

According to the last reported balance sheet, Himile Mechanical Science and Technology (Shandong) had liabilities of CN¥1.27b due within 12 months, and liabilities of CN¥235.8m due beyond 12 months. Offsetting this, it had CN¥1.79b in cash and CN¥3.08b in receivables that were due within 12 months. So it can boast CN¥3.37b 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. Simply put, the fact that Himile Mechanical Science and Technology (Shandong) has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Himile Mechanical Science and Technology (Shandong) has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Himile Mechanical Science and Technology (Shandong) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Himile Mechanical Science and Technology (Shandong) 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. Looking at the most recent three years, Himile Mechanical Science and Technology (Shandong) recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥1.73b, as well as more liquid assets than liabilities. And we liked the look of last year's 34% year-on-year EBIT growth. So is Himile Mechanical Science and Technology (Shandong)'s debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Himile Mechanical Science and Technology (Shandong) you should know about.

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.