These 4 Measures Indicate That Harbin Electric (HKG:1133) Is Using Debt Reasonably Well

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.' 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 can see that Harbin Electric Company Limited (HKG:1133) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. 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.

How Much Debt Does Harbin Electric Carry?

The image below, which you can click on for greater detail, shows that Harbin Electric had debt of CN¥5.01b at the end of June 2025, a reduction from CN¥5.60b over a year. But it also has CN¥22.3b in cash to offset that, meaning it has CN¥17.3b net cash.

How Healthy Is Harbin Electric's Balance Sheet?

According to the last reported balance sheet, Harbin Electric had liabilities of CN¥61.4b due within 12 months, and liabilities of CN¥2.18b due beyond 12 months. Offsetting these obligations, it had cash of CN¥22.3b as well as receivables valued at CN¥18.9b due within 12 months. So it has liabilities totalling CN¥22.4b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥27.3b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Harbin Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Harbin Electric

Even more impressive was the fact that Harbin Electric grew its EBIT by 177% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Harbin Electric's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Harbin Electric 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. In the last two years, Harbin Electric's free cash flow amounted to 30% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Harbin Electric does have more liabilities than liquid assets, it also has net cash of CN¥17.3b. And it impressed us with its EBIT growth of 177% over the last year. So we don't have any problem with Harbin Electric's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Harbin Electric's earnings per share history for free.

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.