Does Harbin Hatou InvestmentLtd (SHSE:600864) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Harbin Hatou Investment Co.,Ltd (SHSE:600864) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Harbin Hatou InvestmentLtd

How Much Debt Does Harbin Hatou InvestmentLtd Carry?

As you can see below, at the end of March 2024, Harbin Hatou InvestmentLtd had CN¥17.2b of debt, up from CN¥15.5b a year ago. Click the image for more detail. But it also has CN¥24.0b in cash to offset that, meaning it has CN¥6.71b net cash.

A Look At Harbin Hatou InvestmentLtd's Liabilities

We can see from the most recent balance sheet that Harbin Hatou InvestmentLtd had liabilities of CN¥20.8b falling due within a year, and liabilities of CN¥6.33b due beyond that. Offsetting these obligations, it had cash of CN¥24.0b as well as receivables valued at CN¥5.86b due within 12 months. So it actually has CN¥2.70b more liquid assets than total liabilities.

This excess liquidity suggests that Harbin Hatou InvestmentLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Harbin Hatou InvestmentLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Harbin Hatou InvestmentLtd is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 332% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Harbin Hatou InvestmentLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Harbin Hatou InvestmentLtd 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. Happily for any shareholders, Harbin Hatou InvestmentLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Harbin Hatou InvestmentLtd has net cash of CN¥6.71b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.2b, being 879% of its EBIT. The bottom line is that we do not find Harbin Hatou InvestmentLtd's debt levels at all concerning. 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. We've identified 2 warning signs with Harbin Hatou InvestmentLtd (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.