Does Hubei Feilihua Quartz Glass (SZSE:300395) Have A 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.' 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 Feilihua Quartz Glass Co., Ltd. (SZSE:300395) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Hubei Feilihua Quartz Glass

What Is Hubei Feilihua Quartz Glass's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Hubei Feilihua Quartz Glass had debt of CN¥192.6m, up from CN¥12.2m in one year. But it also has CN¥1.39b in cash to offset that, meaning it has CN¥1.20b net cash.

A Look At Hubei Feilihua Quartz Glass' Liabilities

Zooming in on the latest balance sheet data, we can see that Hubei Feilihua Quartz Glass had liabilities of CN¥874.3m due within 12 months and liabilities of CN¥339.2m due beyond that. On the other hand, it had cash of CN¥1.39b and CN¥939.6m worth of receivables due within a year. So it can boast CN¥1.12b more liquid assets than total liabilities.

This surplus suggests that Hubei Feilihua Quartz Glass has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hubei Feilihua Quartz Glass has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Hubei Feilihua Quartz Glass grew its EBIT by 12% last year, making its debt load easier to handle. 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 Hubei Feilihua Quartz Glass'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, a company can only pay off debt with cold hard cash, not accounting profits. Hubei Feilihua Quartz Glass may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Hubei Feilihua Quartz Glass actually recorded a cash outflow, overall. 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 Hubei Feilihua Quartz Glass has CN¥1.20b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 12% over the last year. So we don't have any problem with Hubei Feilihua Quartz Glass's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Hubei Feilihua Quartz Glass that you should be aware of before investing here.

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.