Does China Harzone Industry (SZSE:300527) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 China Harzone Industry Corp., Ltd (SZSE:300527) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Harzone Industry

What Is China Harzone Industry's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 China Harzone Industry had CN¥342.4m of debt, an increase on CN¥329.1m, over one year. But it also has CN¥1.22b in cash to offset that, meaning it has CN¥878.0m net cash.

How Healthy Is China Harzone Industry's Balance Sheet?

We can see from the most recent balance sheet that China Harzone Industry had liabilities of CN¥746.2m falling due within a year, and liabilities of CN¥458.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.22b as well as receivables valued at CN¥782.2m due within 12 months. So it actually has CN¥797.6m more liquid assets than total liabilities.

This short term liquidity is a sign that China Harzone Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Harzone Industry boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Harzone Industry's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, China Harzone Industry made a loss at the EBIT level, and saw its revenue drop to CN¥987m, which is a fall of 14%. We would much prefer see growth.

So How Risky Is China Harzone Industry?

Although China Harzone Industry had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥1.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for China Harzone Industry (2 are a bit concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.