Guangdong KinLong Hardware ProductsLtd (SZSE:002791) Has A Pretty 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.' 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 Guangdong KinLong Hardware Products Co.,Ltd. (SZSE:002791) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangdong KinLong Hardware ProductsLtd

What Is Guangdong KinLong Hardware ProductsLtd's Debt?

As you can see below, Guangdong KinLong Hardware ProductsLtd had CN¥326.1m of debt at September 2024, down from CN¥553.1m a year prior. However, it does have CN¥1.41b in cash offsetting this, leading to net cash of CN¥1.08b.

How Healthy Is Guangdong KinLong Hardware ProductsLtd's Balance Sheet?

According to the last reported balance sheet, Guangdong KinLong Hardware ProductsLtd had liabilities of CN¥3.92b due within 12 months, and liabilities of CN¥326.3m due beyond 12 months. On the other hand, it had cash of CN¥1.41b and CN¥4.19b worth of receivables due within a year. So it can boast CN¥1.35b more liquid assets than total liabilities.

This surplus suggests that Guangdong KinLong Hardware ProductsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangdong KinLong Hardware ProductsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Guangdong KinLong Hardware ProductsLtd has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Guangdong KinLong Hardware ProductsLtd 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. Guangdong KinLong Hardware ProductsLtd 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, Guangdong KinLong Hardware ProductsLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong KinLong Hardware ProductsLtd has CN¥1.08b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in CN¥230m. So we don't think Guangdong KinLong Hardware ProductsLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Guangdong KinLong Hardware ProductsLtd 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.