Henan Mingtai Al.IndustrialLtd (SHSE:601677) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Henan Mingtai Al.Industrial Co.,Ltd. (SHSE:601677) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Henan Mingtai Al.IndustrialLtd

What Is Henan Mingtai Al.IndustrialLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Henan Mingtai Al.IndustrialLtd had CN¥498.3m of debt in June 2024, down from CN¥1.13b, one year before. But it also has CN¥3.97b in cash to offset that, meaning it has CN¥3.47b net cash.

How Healthy Is Henan Mingtai Al.IndustrialLtd's Balance Sheet?

We can see from the most recent balance sheet that Henan Mingtai Al.IndustrialLtd had liabilities of CN¥5.77b falling due within a year, and liabilities of CN¥343.0m due beyond that. On the other hand, it had cash of CN¥3.97b and CN¥4.64b worth of receivables due within a year. So it actually has CN¥2.50b more liquid assets than total liabilities.

This surplus suggests that Henan Mingtai Al.IndustrialLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Henan Mingtai Al.IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Henan Mingtai Al.IndustrialLtd grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Henan Mingtai Al.IndustrialLtd 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 Henan Mingtai Al.IndustrialLtd 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 last three years, Henan Mingtai Al.IndustrialLtd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Henan Mingtai Al.IndustrialLtd has CN¥3.47b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 47% over the last year. So we don't think Henan Mingtai Al.IndustrialLtd'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. For instance, we've identified 2 warning signs for Henan Mingtai Al.IndustrialLtd 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.

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.