Zhejiang HangminLtd (SHSE:600987) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Zhejiang Hangmin Co.,Ltd (SHSE:600987) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhejiang HangminLtd

How Much Debt Does Zhejiang HangminLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Zhejiang HangminLtd had debt of CN¥33.5m, up from none in one year. But it also has CN¥3.84b in cash to offset that, meaning it has CN¥3.81b net cash.

A Look At Zhejiang HangminLtd's Liabilities

According to the last reported balance sheet, Zhejiang HangminLtd had liabilities of CN¥3.14b due within 12 months, and liabilities of CN¥127.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.84b as well as receivables valued at CN¥884.4m due within 12 months. So it can boast CN¥1.45b more liquid assets than total liabilities.

This excess liquidity suggests that Zhejiang HangminLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zhejiang HangminLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Zhejiang HangminLtd grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang HangminLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang HangminLtd 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, Zhejiang HangminLtd produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang HangminLtd has CN¥3.81b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in CN¥877m. So is Zhejiang HangminLtd's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Zhejiang HangminLtd's dividend history, without delay!

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.