Is Guangdong KinLong Hardware ProductsLtd (SZSE:002791) A Risky Investment?

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 Guangdong KinLong Hardware Products Co.,Ltd. (SZSE:002791) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Guangdong KinLong Hardware ProductsLtd

What Is Guangdong KinLong Hardware ProductsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Guangdong KinLong Hardware ProductsLtd had debt of CN¥376.0m at the end of March 2024, a reduction from CN¥756.4m over a year. But on the other hand it also has CN¥781.1m in cash, leading to a CN¥405.1m net cash position.

A Look At Guangdong KinLong Hardware ProductsLtd's Liabilities

According to the last reported balance sheet, Guangdong KinLong Hardware ProductsLtd had liabilities of CN¥3.37b due within 12 months, and liabilities of CN¥325.3m due beyond 12 months. Offsetting this, it had CN¥781.1m in cash and CN¥3.91b in receivables that were due within 12 months. So it can boast CN¥994.3m more liquid assets than total liabilities.

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

Even more impressive was the fact that Guangdong KinLong Hardware ProductsLtd grew its EBIT by 136% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangdong KinLong Hardware ProductsLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 most recent three years, Guangdong KinLong Hardware ProductsLtd recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong KinLong Hardware ProductsLtd has net cash of CN¥405.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 136% over the last year. So is Guangdong KinLong Hardware ProductsLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Guangdong KinLong Hardware ProductsLtd's earnings per share history for free.

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.

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.