Does Hubei DinglongLtd (SZSE:300054) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies Hubei Dinglong CO.,Ltd. (SZSE:300054) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Hubei DinglongLtd

How Much Debt Does Hubei DinglongLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hubei DinglongLtd had CN¥1.35b of debt, an increase on CN¥897.8m, over one year. However, because it has a cash reserve of CN¥1.10b, its net debt is less, at about CN¥253.1m.

How Strong Is Hubei DinglongLtd's Balance Sheet?

We can see from the most recent balance sheet that Hubei DinglongLtd had liabilities of CN¥1.35b falling due within a year, and liabilities of CN¥1.16b due beyond that. Offsetting this, it had CN¥1.10b in cash and CN¥1.09b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥324.5m.

Having regard to Hubei DinglongLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥26.0b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Hubei DinglongLtd has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Hubei DinglongLtd has a low net debt to EBITDA ratio of only 0.35. And its EBIT easily covers its interest expense, being 22.7 times the size. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Hubei DinglongLtd has boosted its EBIT by 98%, thus reducing the spectre of future debt repayments. 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 Hubei DinglongLtd can strengthen its balance sheet over time. 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Hubei DinglongLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Hubei DinglongLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Taking all this data into account, it seems to us that Hubei DinglongLtd takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hubei DinglongLtd's earnings per share history for free.

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.

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.