We Think Hangzhou Heatwell Electric Heating Technology (SHSE:603075) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. Importantly, Hangzhou Heatwell Electric Heating Technology Co., Ltd. (SHSE:603075) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Hangzhou Heatwell Electric Heating Technology

How Much Debt Does Hangzhou Heatwell Electric Heating Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Hangzhou Heatwell Electric Heating Technology had CN¥346.4m of debt in September 2023, down from CN¥462.4m, one year before. However, its balance sheet shows it holds CN¥925.4m in cash, so it actually has CN¥579.0m net cash.

A Look At Hangzhou Heatwell Electric Heating Technology's Liabilities

We can see from the most recent balance sheet that Hangzhou Heatwell Electric Heating Technology had liabilities of CN¥833.7m falling due within a year, and liabilities of CN¥31.3m due beyond that. Offsetting these obligations, it had cash of CN¥925.4m as well as receivables valued at CN¥522.5m due within 12 months. So it can boast CN¥582.9m more liquid assets than total liabilities.

This surplus suggests that Hangzhou Heatwell Electric Heating Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hangzhou Heatwell Electric Heating Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hangzhou Heatwell Electric Heating Technology grew its EBIT by 9.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hangzhou Heatwell Electric Heating Technology'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hangzhou Heatwell Electric Heating Technology 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. Looking at the most recent three years, Hangzhou Heatwell Electric Heating Technology recorded free cash flow of 20% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou Heatwell Electric Heating Technology has CN¥579.0m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 9.4% in the last twelve months. So we don't have any problem with Hangzhou Heatwell Electric Heating Technology's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Hangzhou Heatwell Electric Heating Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.