Does Fujian Mindong Electric Power Limited (SZSE:000993) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Fujian Mindong Electric Power Limited Company (SZSE:000993) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fujian Mindong Electric Power Limited

How Much Debt Does Fujian Mindong Electric Power Limited Carry?

As you can see below, Fujian Mindong Electric Power Limited had CN¥308.9m of debt at December 2023, down from CN¥462.7m a year prior. However, it does have CN¥310.9m in cash offsetting this, leading to net cash of CN¥1.96m.

How Healthy Is Fujian Mindong Electric Power Limited's Balance Sheet?

We can see from the most recent balance sheet that Fujian Mindong Electric Power Limited had liabilities of CN¥324.3m falling due within a year, and liabilities of CN¥552.5m due beyond that. On the other hand, it had cash of CN¥310.9m and CN¥217.2m worth of receivables due within a year. So its liabilities total CN¥348.7m more than the combination of its cash and short-term receivables.

Given Fujian Mindong Electric Power Limited has a market capitalization of CN¥4.47b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Fujian Mindong Electric Power Limited also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Fujian Mindong Electric Power Limited grew its EBIT by 85% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fujian Mindong Electric Power Limited 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 company can only pay off debt with cold hard cash, not accounting profits. Fujian Mindong Electric Power Limited 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, Fujian Mindong Electric Power Limited actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fujian Mindong Electric Power Limited has CN¥1.96m in net cash. The cherry on top was that in converted 154% of that EBIT to free cash flow, bringing in CN¥14m. So we don't think Fujian Mindong Electric Power Limited's use of debt is risky. 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 Fujian Mindong Electric Power Limited , and understanding them should be part of your investment process.

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.