Does Hexing ElectricalLtd (SHSE:603556) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hexing Electrical Co.,Ltd. (SHSE:603556) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hexing ElectricalLtd

What Is Hexing ElectricalLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hexing ElectricalLtd had CN¥745.6m of debt, an increase on CN¥662.4m, over one year. But it also has CN¥3.87b in cash to offset that, meaning it has CN¥3.12b net cash.

How Strong Is Hexing ElectricalLtd's Balance Sheet?

We can see from the most recent balance sheet that Hexing ElectricalLtd had liabilities of CN¥2.18b falling due within a year, and liabilities of CN¥307.9m due beyond that. Offsetting this, it had CN¥3.87b in cash and CN¥1.47b in receivables that were due within 12 months. So it can boast CN¥2.85b more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Hexing ElectricalLtd has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. 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 Hexing ElectricalLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hexing ElectricalLtd 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. Over the last three years, Hexing ElectricalLtd recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hexing ElectricalLtd has CN¥3.12b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in CN¥891m. So we don't think Hexing ElectricalLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hexing ElectricalLtd , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.