Hisense Home Appliances Group (SZSE:000921) Could Easily Take On More Debt

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.' 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, Hisense Home Appliances Group Co., Ltd. (SZSE:000921) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Hisense Home Appliances Group

What Is Hisense Home Appliances Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Hisense Home Appliances Group had CN¥2.56b of debt, an increase on CN¥1.50b, over one year. But it also has CN¥22.2b in cash to offset that, meaning it has CN¥19.6b net cash.

How Healthy Is Hisense Home Appliances Group's Balance Sheet?

We can see from the most recent balance sheet that Hisense Home Appliances Group had liabilities of CN¥44.0b falling due within a year, and liabilities of CN¥2.51b due beyond that. Offsetting these obligations, it had cash of CN¥22.2b as well as receivables valued at CN¥14.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.56b.

Hisense Home Appliances Group has a market capitalization of CN¥44.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Hisense Home Appliances Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hisense Home Appliances Group grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hisense Home Appliances Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hisense Home Appliances Group 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. Over the last three years, Hisense Home Appliances Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Hisense Home Appliances Group'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¥19.6b. And it impressed us with free cash flow of CN¥9.6b, being 174% of its EBIT. So we don't think Hisense Home Appliances Group'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. Be aware that Hisense Home Appliances Group is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.