Is Harbin Electric (HKG:1133) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Harbin Electric Company Limited (HKG:1133) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Harbin Electric

How Much Debt Does Harbin Electric Carry?

As you can see below, at the end of June 2021, Harbin Electric had CN¥7.62b of debt, up from CN¥6.52b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥11.8b in cash, so it actually has CN¥4.18b net cash.

How Strong Is Harbin Electric's Balance Sheet?

We can see from the most recent balance sheet that Harbin Electric had liabilities of CN¥40.1b falling due within a year, and liabilities of CN¥3.68b due beyond that. Offsetting this, it had CN¥11.8b in cash and CN¥24.3b in receivables that were due within 12 months. So it has liabilities totalling CN¥7.65b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥3.20b 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'd watch its balance sheet closely, without a doubt. At the end of the day, Harbin Electric would probably need a major re-capitalization if its creditors were to demand repayment. Given that Harbin Electric has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. 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 17%, to CN¥26b. 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¥2.3b. 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. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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 2 warning signs in our investment analysis , you should know about...

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.
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