We Think Changhong Meiling (SZSE:000521) Can Manage Its Debt With Ease

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.' 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, Changhong Meiling Co., Ltd. (SZSE:000521) 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Changhong Meiling

How Much Debt Does Changhong Meiling Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Changhong Meiling had CN¥1.40b of debt, an increase on CN¥666.0m, over one year. But it also has CN¥8.64b in cash to offset that, meaning it has CN¥7.23b net cash.

How Strong Is Changhong Meiling's Balance Sheet?

We can see from the most recent balance sheet that Changhong Meiling had liabilities of CN¥14.9b falling due within a year, and liabilities of CN¥338.5m due beyond that. Offsetting these obligations, it had cash of CN¥8.64b as well as receivables valued at CN¥4.24b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.34b.

While this might seem like a lot, it is not so bad since Changhong Meiling has a market capitalization of CN¥7.36b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Changhong Meiling boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Changhong Meiling grew its EBIT by 244% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changhong Meiling 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, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Changhong Meiling actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Changhong Meiling's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥7.23b. And it impressed us with free cash flow of CN¥2.1b, being 448% of its EBIT. So is Changhong Meiling's debt a risk? It doesn't seem so to us. 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.

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.

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