Huali Industrial Group (SZSE:300979) Has A Pretty Healthy Balance Sheet

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.' 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. We note that Huali Industrial Group Company Limited (SZSE:300979) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Huali Industrial Group

What Is Huali Industrial Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Huali Industrial Group had CN¥546.5m of debt in March 2024, down from CN¥1.17b, one year before. But it also has CN¥6.80b in cash to offset that, meaning it has CN¥6.25b net cash.

How Strong Is Huali Industrial Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Huali Industrial Group had liabilities of CN¥3.86b due within 12 months and liabilities of CN¥179.7m due beyond that. Offsetting these obligations, it had cash of CN¥6.80b as well as receivables valued at CN¥2.91b due within 12 months. So it actually has CN¥5.66b more liquid assets than total liabilities.

This short term liquidity is a sign that Huali Industrial Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Huali Industrial Group has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Huali Industrial Group grew its EBIT by 14% last year, making its debt load easier to handle. 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 Huali Industrial Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Huali Industrial Group 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. Over the most recent three years, Huali Industrial Group recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Huali Industrial Group has CN¥6.25b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't think Huali Industrial Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Huali Industrial Group that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.