Does Hangzhou Robam Appliances (SZSE:002508) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Hangzhou Robam Appliances Co., Ltd. (SZSE:002508) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hangzhou Robam Appliances

What Is Hangzhou Robam Appliances's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Hangzhou Robam Appliances had debt of CN¥101.9m, up from CN¥66.1m in one year. However, its balance sheet shows it holds CN¥8.55b in cash, so it actually has CN¥8.45b net cash.

A Look At Hangzhou Robam Appliances' Liabilities

According to the last reported balance sheet, Hangzhou Robam Appliances had liabilities of CN¥5.05b due within 12 months, and liabilities of CN¥148.9m due beyond 12 months. On the other hand, it had cash of CN¥8.55b and CN¥2.81b worth of receivables due within a year. So it can boast CN¥6.16b more liquid assets than total liabilities.

This excess liquidity suggests that Hangzhou Robam Appliances is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hangzhou Robam Appliances has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Hangzhou Robam Appliances grew its EBIT by 8.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hangzhou Robam Appliances 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. Hangzhou Robam Appliances 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, Hangzhou Robam Appliances generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou Robam Appliances has CN¥8.45b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥1.8b. So is Hangzhou Robam Appliances's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Hangzhou Robam Appliances has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.