Does Sichuan Changhong ElectricLtd (SHSE:600839) Have A Healthy Balance Sheet?

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, Sichuan Changhong Electric Co.,Ltd. (SHSE:600839) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sichuan Changhong ElectricLtd

What Is Sichuan Changhong ElectricLtd's Net Debt?

As you can see below, at the end of March 2024, Sichuan Changhong ElectricLtd had CN¥19.7b of debt, up from CN¥18.5b a year ago. Click the image for more detail. But it also has CN¥25.2b in cash to offset that, meaning it has CN¥5.46b net cash.

How Healthy Is Sichuan Changhong ElectricLtd's Balance Sheet?

We can see from the most recent balance sheet that Sichuan Changhong ElectricLtd had liabilities of CN¥65.4b falling due within a year, and liabilities of CN¥5.10b due beyond that. On the other hand, it had cash of CN¥25.2b and CN¥20.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥25.2b.

When you consider that this deficiency exceeds the company's CN¥20.0b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Sichuan Changhong ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

And we also note warmly that Sichuan Changhong ElectricLtd grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sichuan Changhong ElectricLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sichuan Changhong ElectricLtd 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. Happily for any shareholders, Sichuan Changhong ElectricLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Sichuan Changhong ElectricLtd does have more liabilities than liquid assets, it also has net cash of CN¥5.46b. And it impressed us with free cash flow of CN¥1.4b, being 166% of its EBIT. So we are not troubled with Sichuan Changhong ElectricLtd's debt use. 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 2 warning signs for Sichuan Changhong ElectricLtd that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com