These 4 Measures Indicate That Himile Mechanical Science and Technology (Shandong) (SZSE:002595) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Himile Mechanical Science and Technology (Shandong) Co., Ltd (SZSE:002595) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Himile Mechanical Science and Technology (Shandong) had CN¥91.9m of debt, an increase on CN¥41.8m, over one year. But it also has CN¥1.50b in cash to offset that, meaning it has CN¥1.41b net cash.

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

The latest balance sheet data shows that Himile Mechanical Science and Technology (Shandong) had liabilities of CN¥1.49b due within a year, and liabilities of CN¥298.7m falling due after that. Offsetting this, it had CN¥1.50b in cash and CN¥3.38b in receivables that were due within 12 months. So it can boast CN¥3.09b 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.

Also positive, Himile Mechanical Science and Technology (Shandong) grew its EBIT by 28% 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 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.

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 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Himile Mechanical Science and Technology (Shandong) has CN¥1.41b in net cash and a decent-looking balance sheet. And we liked the look of last year's 28% 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. 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, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.