These 4 Measures Indicate That Hisense Visual Technology (SHSE:600060) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hisense Visual Technology Co., Ltd. (SHSE:600060) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Hisense Visual Technology

How Much Debt Does Hisense Visual Technology Carry?

As you can see below, at the end of March 2024, Hisense Visual Technology had CN¥1.61b of debt, up from CN¥1.49b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥14.6b in cash, so it actually has CN¥13.0b net cash.

How Strong Is Hisense Visual Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hisense Visual Technology had liabilities of CN¥16.0b due within 12 months and liabilities of CN¥1.52b due beyond that. Offsetting these obligations, it had cash of CN¥14.6b as well as receivables valued at CN¥12.2b due within 12 months. So it can boast CN¥9.29b more liquid assets than total liabilities.

This excess liquidity suggests that Hisense Visual Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hisense Visual Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Hisense Visual Technology saw its EBIT drop by 9.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hisense Visual Technology's ability to maintain a healthy balance sheet going forward. 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. Hisense Visual Technology 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, Hisense Visual Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hisense Visual Technology has CN¥13.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥837m, being 170% of its EBIT. So we don't think Hisense Visual Technology's use of debt is risky. 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. We've identified 1 warning sign with Hisense Visual Technology , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.