Hangzhou Greatstar Industrial (SZSE:002444) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Hangzhou Greatstar Industrial Co., Ltd (SZSE:002444) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hangzhou Greatstar Industrial

How Much Debt Does Hangzhou Greatstar Industrial Carry?

The chart below, which you can click on for greater detail, shows that Hangzhou Greatstar Industrial had CN¥3.38b in debt in September 2024; about the same as the year before. But it also has CN¥6.26b in cash to offset that, meaning it has CN¥2.88b net cash.

How Strong Is Hangzhou Greatstar Industrial's Balance Sheet?

According to the last reported balance sheet, Hangzhou Greatstar Industrial had liabilities of CN¥5.84b due within 12 months, and liabilities of CN¥455.6m due beyond 12 months. Offsetting this, it had CN¥6.26b in cash and CN¥3.80b in receivables that were due within 12 months. So it actually has CN¥3.75b more liquid assets than total liabilities.

This surplus suggests that Hangzhou Greatstar Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hangzhou Greatstar Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Hangzhou Greatstar Industrial grew its EBIT by 34% 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 Hangzhou Greatstar Industrial's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hangzhou Greatstar Industrial 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. During the last three years, Hangzhou Greatstar Industrial produced sturdy free cash flow equating to 74% 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 we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Greatstar Industrial has net cash of CN¥2.88b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. So is Hangzhou Greatstar Industrial's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hangzhou Greatstar Industrial has 1 warning sign we think you should be aware of.

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.