Does Zhuzhou Hongda ElectronicsLtd (SZSE:300726) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Zhuzhou Hongda Electronics Corp.,Ltd. (SZSE:300726) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhuzhou Hongda ElectronicsLtd

What Is Zhuzhou Hongda ElectronicsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zhuzhou Hongda ElectronicsLtd had CN¥12.0m of debt in June 2024, down from CN¥25.0m, one year before. But it also has CN¥1.48b in cash to offset that, meaning it has CN¥1.47b net cash.

A Look At Zhuzhou Hongda ElectronicsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhuzhou Hongda ElectronicsLtd had liabilities of CN¥460.1m due within 12 months and liabilities of CN¥199.2m due beyond that. Offsetting this, it had CN¥1.48b in cash and CN¥1.88b in receivables that were due within 12 months. So it can boast CN¥2.71b more liquid assets than total liabilities.

This excess liquidity is a great indication that Zhuzhou Hongda ElectronicsLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Zhuzhou Hongda ElectronicsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Zhuzhou Hongda ElectronicsLtd's saving grace is its low debt levels, because its EBIT has tanked 51% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhuzhou Hongda ElectronicsLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhuzhou Hongda ElectronicsLtd 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. In the last three years, Zhuzhou Hongda ElectronicsLtd's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhuzhou Hongda ElectronicsLtd has CN¥1.47b in net cash and a decent-looking balance sheet. So we are not troubled with Zhuzhou Hongda ElectronicsLtd'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 instance, we've identified 4 warning signs for Zhuzhou Hongda ElectronicsLtd that 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.