We Think Hangzhou Robam Appliances (SZSE:002508) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Hangzhou Robam Appliances Co., Ltd. (SZSE:002508) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 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 it also has CN¥2.69b in cash to offset that, meaning it has CN¥2.60b net cash.

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A Look At Hangzhou Robam Appliances' Liabilities

We can see from the most recent balance sheet that Hangzhou Robam Appliances had liabilities of CN¥4.77b falling due within a year, and liabilities of CN¥154.1m due beyond that. Offsetting these obligations, it had cash of CN¥2.69b as well as receivables valued at CN¥2.58b due within 12 months. So it can boast CN¥357.3m more liquid assets than total liabilities.

This state of affairs indicates that Hangzhou Robam Appliances' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥22.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Hangzhou Robam Appliances boasts net cash, so it's fair to say it does not have a heavy debt load!

Hangzhou Robam Appliances's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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 Robam Appliances'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. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hangzhou Robam Appliances is showing 1 warning sign in our investment analysis , you should know about...

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.