We Think Hanwei Electronics Group (SZSE:300007) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Hanwei Electronics Group Corporation (SZSE:300007) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Hanwei Electronics Group

How Much Debt Does Hanwei Electronics Group Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Hanwei Electronics Group had debt of CN¥1.00b, up from CN¥753.7m in one year. But on the other hand it also has CN¥1.06b in cash, leading to a CN¥60.3m net cash position.

A Look At Hanwei Electronics Group's Liabilities

We can see from the most recent balance sheet that Hanwei Electronics Group had liabilities of CN¥1.76b falling due within a year, and liabilities of CN¥1.18b due beyond that. Offsetting this, it had CN¥1.06b in cash and CN¥1.64b in receivables that were due within 12 months. So it has liabilities totalling CN¥243.6m more than its cash and near-term receivables, combined.

Given Hanwei Electronics Group has a market capitalization of CN¥4.42b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Hanwei Electronics Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Hanwei Electronics Group grew its EBIT by 14,499% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hanwei Electronics Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hanwei Electronics Group 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, Hanwei Electronics Group 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Hanwei Electronics Group has CN¥60.3m in net cash. And it impressed us with its EBIT growth of 14,499% over the last year. So we are not troubled with Hanwei Electronics Group's debt use. 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. For example - Hanwei Electronics Group has 3 warning signs we think you should be aware of.

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.

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