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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Hangzhou Heatwell Electric Heating Technology Co., Ltd. (SHSE:603075) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hangzhou Heatwell Electric Heating Technology

How Much Debt Does Hangzhou Heatwell Electric Heating Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Hangzhou Heatwell Electric Heating Technology had debt of CN¥370.2m, up from CN¥346.4m in one year. However, it does have CN¥864.0m in cash offsetting this, leading to net cash of CN¥493.8m.

A Look At Hangzhou Heatwell Electric Heating Technology's Liabilities

The latest balance sheet data shows that Hangzhou Heatwell Electric Heating Technology had liabilities of CN¥860.7m due within a year, and liabilities of CN¥12.7m falling due after that. Offsetting these obligations, it had cash of CN¥864.0m as well as receivables valued at CN¥667.3m due within 12 months. So it can boast CN¥657.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou Heatwell Electric Heating Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hangzhou Heatwell Electric Heating Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

While Hangzhou Heatwell Electric Heating Technology doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. Hangzhou Heatwell Electric Heating 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. In the last three years, Hangzhou Heatwell Electric Heating Technology's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Heatwell Electric Heating Technology has net cash of CN¥493.8m, as well as more liquid assets than liabilities. So we don't have any problem with Hangzhou Heatwell Electric Heating Technology's use of debt. 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 Hangzhou Heatwell Electric Heating Technology , and understanding them should be part of your investment process.

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.