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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Harbin Hatou Investment Co.,Ltd (SHSE:600864) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Harbin Hatou InvestmentLtd

What Is Harbin Hatou InvestmentLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Harbin Hatou InvestmentLtd had debt of CN¥18.8b, up from CN¥14.6b in one year. But on the other hand it also has CN¥27.0b in cash, leading to a CN¥8.21b net cash position.

How Strong Is Harbin Hatou InvestmentLtd's Balance Sheet?

We can see from the most recent balance sheet that Harbin Hatou InvestmentLtd had liabilities of CN¥26.0b falling due within a year, and liabilities of CN¥3.80b due beyond that. On the other hand, it had cash of CN¥27.0b and CN¥5.44b worth of receivables due within a year. So it can boast CN¥2.63b more liquid assets than total liabilities.

It's good to see that Harbin Hatou InvestmentLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Harbin Hatou InvestmentLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Harbin Hatou InvestmentLtd's load is not too heavy, because its EBIT was down 27% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Harbin Hatou InvestmentLtd 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Harbin Hatou InvestmentLtd 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. 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¥8.21b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.8b, being 1,076% of its EBIT. So is Harbin Hatou InvestmentLtd'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. However, not all investment risk resides within the balance sheet - far from it. For example Harbin Hatou InvestmentLtd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.