These 4 Measures Indicate That Hangzhou Robam Appliances (SZSE:002508) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Hangzhou Robam Appliances Co., Ltd. (SZSE:002508) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hangzhou Robam Appliances

What Is Hangzhou Robam Appliances's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Hangzhou Robam Appliances had debt of CN¥88.5m, up from CN¥72.9m in one year. But it also has CN¥4.30b in cash to offset that, meaning it has CN¥4.21b net cash.

How Healthy Is Hangzhou Robam Appliances' Balance Sheet?

The latest balance sheet data shows that Hangzhou Robam Appliances had liabilities of CN¥4.49b due within a year, and liabilities of CN¥170.3m falling due after that. Offsetting these obligations, it had cash of CN¥4.30b as well as receivables valued at CN¥2.12b due within 12 months. So it actually has CN¥1.76b more liquid assets than total liabilities.

This surplus suggests that Hangzhou Robam Appliances has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

In addition to that, we're happy to report that Hangzhou Robam Appliances has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hangzhou Robam Appliances can strengthen its balance sheet over time. 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. 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. Happily for any shareholders, Hangzhou Robam Appliances actually produced more free cash flow than EBIT over the last three years. 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 investigate a company's debt, in this case Hangzhou Robam Appliances has CN¥4.21b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in CN¥1.9b. So we don't think Hangzhou Robam Appliances's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hangzhou Robam Appliances you should know about.

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.

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

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.