Does Hangzhou Hikvision Digital Technology (SZSE:002415) 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. We note that Hangzhou Hikvision Digital Technology Co., Ltd. (SZSE:002415) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hangzhou Hikvision Digital Technology

How Much Debt Does Hangzhou Hikvision Digital Technology Carry?

The chart below, which you can click on for greater detail, shows that Hangzhou Hikvision Digital Technology had CN¥14.9b in debt in June 2024; about the same as the year before. But it also has CN¥34.1b in cash to offset that, meaning it has CN¥19.2b net cash.

How Strong Is Hangzhou Hikvision Digital Technology's Balance Sheet?

According to the last reported balance sheet, Hangzhou Hikvision Digital Technology had liabilities of CN¥40.6b due within 12 months, and liabilities of CN¥7.28b due beyond 12 months. Offsetting these obligations, it had cash of CN¥34.1b as well as receivables valued at CN¥46.3b due within 12 months. So it can boast CN¥32.6b more liquid assets than total liabilities.

This surplus suggests that Hangzhou Hikvision Digital Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hangzhou Hikvision Digital Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Hangzhou Hikvision Digital Technology grew its EBIT by 17% 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 Hangzhou Hikvision Digital Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hangzhou Hikvision Digital Technology 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. During the last three years, Hangzhou Hikvision Digital Technology produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou Hikvision Digital Technology has CN¥19.2b in net cash and a decent-looking balance sheet. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't think Hangzhou Hikvision Digital Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hangzhou Hikvision Digital Technology you should know about.

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.