These 4 Measures Indicate That Hangzhou Hikvision Digital Technology (SZSE:002415) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hangzhou Hikvision Digital Technology had CN¥16.5b of debt, an increase on CN¥14.2b, over one year. But it also has CN¥44.1b in cash to offset that, meaning it has CN¥27.6b net cash.

How Healthy 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¥38.4b falling due within a year, and liabilities of CN¥9.24b due beyond that. On the other hand, it had cash of CN¥44.1b and CN¥40.8b worth of receivables due within a year. So it can boast CN¥37.3b 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. Simply put, the fact that Hangzhou Hikvision Digital Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Hangzhou Hikvision Digital Technology grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. 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¥27.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 21% year-on-year EBIT growth. So is Hangzhou Hikvision Digital Technology's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Hangzhou Hikvision Digital Technology that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com