Hangzhou Hikvision Digital Technology (SZSE:002415) Could Easily Take On More Debt

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. We can see that Hangzhou Hikvision Digital Technology Co., Ltd. (SZSE:002415) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hangzhou Hikvision Digital Technology

What Is Hangzhou Hikvision Digital Technology's Debt?

As you can see below, Hangzhou Hikvision Digital Technology had CN¥8.07b of debt at September 2024, down from CN¥17.2b a year prior. However, its balance sheet shows it holds CN¥28.3b in cash, so it actually has CN¥20.2b net cash.

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

We can see from the most recent balance sheet that Hangzhou Hikvision Digital Technology had liabilities of CN¥33.6b falling due within a year, and liabilities of CN¥7.26b due beyond that. Offsetting these obligations, it had cash of CN¥28.3b as well as receivables valued at CN¥45.9b due within 12 months. So it can boast CN¥33.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou Hikvision Digital Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hangzhou Hikvision Digital Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hangzhou Hikvision Digital Technology grew its EBIT by 8.9% in the last year, making that debt load look even more manageable. 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 Hangzhou Hikvision Digital Technology 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. Hangzhou Hikvision Digital Technology 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 most recent three years, Hangzhou Hikvision Digital Technology recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou Hikvision Digital Technology has CN¥20.2b in net cash and a decent-looking balance sheet. So is Hangzhou Hikvision Digital Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hangzhou Hikvision Digital Technology is showing 1 warning sign in our investment analysis , 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.