Does Henan Liliang Diamond (SZSE:301071) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Henan Liliang Diamond Co., Ltd. (SZSE:301071) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Henan Liliang Diamond

What Is Henan Liliang Diamond's Net Debt?

As you can see below, at the end of March 2024, Henan Liliang Diamond had CN¥409.8m of debt, up from CN¥266.8m a year ago. Click the image for more detail. But it also has CN¥3.77b in cash to offset that, meaning it has CN¥3.36b net cash.

A Look At Henan Liliang Diamond's Liabilities

We can see from the most recent balance sheet that Henan Liliang Diamond had liabilities of CN¥753.5m falling due within a year, and liabilities of CN¥451.8m due beyond that. Offsetting this, it had CN¥3.77b in cash and CN¥248.2m in receivables that were due within 12 months. So it actually has CN¥2.81b more liquid assets than total liabilities.

This excess liquidity is a great indication that Henan Liliang Diamond's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Henan Liliang Diamond boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Henan Liliang Diamond's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Henan Liliang Diamond'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Henan Liliang Diamond 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. During the last three years, Henan Liliang Diamond burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Henan Liliang Diamond has net cash of CN¥3.36b, as well as more liquid assets than liabilities. So we are not troubled with Henan Liliang Diamond's debt use. 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 example Henan Liliang Diamond has 2 warning signs (and 1 which is concerning) we think 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.