Haier Smart Home (SHSE:600690) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Haier Smart Home Co., Ltd. (SHSE:600690) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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.

View our latest analysis for Haier Smart Home

What Is Haier Smart Home's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Haier Smart Home had debt of CN¥30.1b, up from CN¥27.8b in one year. However, its balance sheet shows it holds CN¥57.3b in cash, so it actually has CN¥27.3b net cash.

How Strong Is Haier Smart Home's Balance Sheet?

According to the last reported balance sheet, Haier Smart Home had liabilities of CN¥125.6b due within 12 months, and liabilities of CN¥28.1b due beyond 12 months. Offsetting these obligations, it had cash of CN¥57.3b as well as receivables valued at CN¥34.0b due within 12 months. So its liabilities total CN¥62.4b more than the combination of its cash and short-term receivables.

Haier Smart Home has a very large market capitalization of CN¥266.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Haier Smart Home boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Haier Smart Home grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Haier Smart Home'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Haier Smart Home 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. During the last three years, Haier Smart Home generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Haier Smart Home does have more liabilities than liquid assets, it also has net cash of CN¥27.3b. And it impressed us with free cash flow of CN¥16b, being 84% of its EBIT. So we don't think Haier Smart Home's use of debt is risky. 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 Haier Smart Home'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.

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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.