Does Changhong Meiling (SZSE:000521) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Changhong Meiling Co., Ltd. (SZSE:000521) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Changhong Meiling

What Is Changhong Meiling's Net Debt?

As you can see below, at the end of December 2023, Changhong Meiling had CN¥1.28b of debt, up from CN¥842.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥9.00b in cash, so it actually has CN¥7.72b net cash.

How Healthy Is Changhong Meiling's Balance Sheet?

The latest balance sheet data shows that Changhong Meiling had liabilities of CN¥12.8b due within a year, and liabilities of CN¥350.6m falling due after that. Offsetting this, it had CN¥9.00b in cash and CN¥3.37b in receivables that were due within 12 months. So it has liabilities totalling CN¥823.3m more than its cash and near-term receivables, combined.

Since publicly traded Changhong Meiling shares are worth a total of CN¥8.67b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Changhong Meiling boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Changhong Meiling grew its EBIT by 691% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Changhong Meiling'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Changhong Meiling 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. Over the last two years, Changhong Meiling actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Changhong Meiling has CN¥7.72b in net cash. And it impressed us with free cash flow of CN¥1.8b, being 442% of its EBIT. So we don't think Changhong Meiling's use of debt is risky. Given Changhong Meiling has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.