China High Speed Transmission Equipment Group (HKG:658) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, China High Speed Transmission Equipment Group Co., Ltd. (HKG:658) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China High Speed Transmission Equipment Group

What Is China High Speed Transmission Equipment Group's Net Debt?

As you can see below, China High Speed Transmission Equipment Group had CN¥3.05b of debt at June 2021, down from CN¥4.58b a year prior. But it also has CN¥5.65b in cash to offset that, meaning it has CN¥2.60b net cash.

How Strong Is China High Speed Transmission Equipment Group's Balance Sheet?

We can see from the most recent balance sheet that China High Speed Transmission Equipment Group had liabilities of CN¥14.7b falling due within a year, and liabilities of CN¥731.7m due beyond that. On the other hand, it had cash of CN¥5.65b and CN¥6.18b worth of receivables due within a year. So it has liabilities totalling CN¥3.64b more than its cash and near-term receivables, combined.

China High Speed Transmission Equipment Group has a market capitalization of CN¥9.78b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, China High Speed Transmission Equipment Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that China High Speed Transmission Equipment Group has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China High Speed Transmission Equipment Group 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. While China High Speed Transmission Equipment Group 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. During the last three years, China High Speed Transmission Equipment Group generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While China High Speed Transmission Equipment Group does have more liabilities than liquid assets, it also has net cash of CN¥2.60b. And it impressed us with free cash flow of CN¥711m, being 92% of its EBIT. So is China High Speed Transmission Equipment Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with China High Speed Transmission Equipment Group (at least 1 which is concerning) , 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.
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