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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Hangzhou Robam Appliances Co., Ltd. (SZSE:002508) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hangzhou Robam Appliances

What Is Hangzhou Robam Appliances's Net Debt?

As you can see below, Hangzhou Robam Appliances had CN¥91.0m of debt at September 2024, down from CN¥98.7m a year prior. But on the other hand it also has CN¥2.69b in cash, leading to a CN¥2.60b net cash position.

How Strong Is Hangzhou Robam Appliances' Balance Sheet?

According to the last reported balance sheet, Hangzhou Robam Appliances had liabilities of CN¥4.77b due within 12 months, and liabilities of CN¥154.1m due beyond 12 months. Offsetting this, it had CN¥2.69b in cash and CN¥2.58b in receivables that were due within 12 months. So it can boast CN¥357.3m more liquid assets than total liabilities.

Having regard to Hangzhou Robam Appliances' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥21.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Hangzhou Robam Appliances boasts net cash, so it's fair to say it does not have a heavy debt load!

While Hangzhou Robam Appliances doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hangzhou Robam Appliances'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hangzhou Robam Appliances 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 Robam Appliances generated free cash flow amounting to a very robust 94% 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¥2.60b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.3b, being 94% of its EBIT. So is Hangzhou Robam Appliances'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, we've discovered 1 warning sign for Hangzhou Robam Appliances that you should be aware of before investing here.

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.