Does Kingclean ElectricLtd (SHSE:603355) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Kingclean Electric Co.,Ltd (SHSE:603355) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kingclean ElectricLtd

What Is Kingclean ElectricLtd's Net Debt?

As you can see below, at the end of September 2024, Kingclean ElectricLtd had CN¥5.11b of debt, up from CN¥3.52b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.94b in cash, so it actually has CN¥822.5m net cash.

How Healthy Is Kingclean ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Kingclean ElectricLtd had liabilities of CN¥5.90b due within a year, and liabilities of CN¥1.97b falling due after that. Offsetting these obligations, it had cash of CN¥5.94b as well as receivables valued at CN¥2.34b due within 12 months. So it can boast CN¥408.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Kingclean ElectricLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kingclean ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Kingclean ElectricLtd has increased its EBIT by 7.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kingclean ElectricLtd can strengthen its balance sheet over time. 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. Kingclean ElectricLtd 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. During the last three years, Kingclean ElectricLtd produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kingclean ElectricLtd has CN¥822.5m in net cash and a decent-looking balance sheet. So we don't think Kingclean ElectricLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Kingclean ElectricLtd .

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.

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

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.