Hangzhou Cogeneration Group (SHSE:605011) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Hangzhou Cogeneration Group Co., Ltd. (SHSE:605011) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hangzhou Cogeneration Group

What Is Hangzhou Cogeneration Group's Debt?

As you can see below, Hangzhou Cogeneration Group had CN¥728.9m of debt at September 2023, down from CN¥1.13b a year prior. But it also has CN¥773.4m in cash to offset that, meaning it has CN¥44.5m net cash.

How Healthy Is Hangzhou Cogeneration Group's Balance Sheet?

According to the last reported balance sheet, Hangzhou Cogeneration Group had liabilities of CN¥797.0m due within 12 months, and liabilities of CN¥371.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥773.4m as well as receivables valued at CN¥354.9m due within 12 months. So its liabilities total CN¥40.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Hangzhou Cogeneration Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥9.05b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hangzhou Cogeneration Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Hangzhou Cogeneration Group's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hangzhou Cogeneration Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hangzhou Cogeneration Group 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. Over the last three years, Hangzhou Cogeneration Group recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hangzhou Cogeneration Group has CN¥44.5m in net cash. And it impressed us with free cash flow of CN¥311m, being 95% of its EBIT. So we don't think Hangzhou Cogeneration Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Hangzhou Cogeneration Group you should be aware of.

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.