Health Check: How Prudently Does Harbin Electric (HKG:1133) Use Debt?

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. We note that Harbin Electric Company Limited (HKG:1133) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Harbin Electric

What Is Harbin Electric's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Harbin Electric had CN¥7.13b of debt, an increase on CN¥6.20b, over one year. But on the other hand it also has CN¥12.5b in cash, leading to a CN¥5.32b net cash position.

A Look At Harbin Electric's Liabilities

Zooming in on the latest balance sheet data, we can see that Harbin Electric had liabilities of CN¥38.4b due within 12 months and liabilities of CN¥3.35b due beyond that. Offsetting these obligations, it had cash of CN¥12.5b as well as receivables valued at CN¥22.6b due within 12 months. So its liabilities total CN¥6.68b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥2.93b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Harbin Electric would probably need a major re-capitalization if its creditors were to demand repayment. Harbin Electric boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Harbin Electric can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Harbin Electric wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to CN¥24b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Harbin Electric?

While Harbin Electric lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥1.6b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. Be aware that Harbin Electric is showing 1 warning sign in our investment analysis , you should know about...

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. 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.
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