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. 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 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is China High Speed Transmission Equipment Group's Debt?
The image below, which you can click on for greater detail, shows that at December 2021 China High Speed Transmission Equipment Group had debt of CN¥4.00b, up from CN¥2.38b in one year. However, its balance sheet shows it holds CN¥6.96b in cash, so it actually has CN¥2.96b net cash.
How Strong Is China High Speed Transmission Equipment Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that China High Speed Transmission Equipment Group had liabilities of CN¥14.7b due within 12 months and liabilities of CN¥1.15b due beyond that. Offsetting these obligations, it had cash of CN¥6.96b as well as receivables valued at CN¥5.43b due within 12 months. So its liabilities total CN¥3.49b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because China High Speed Transmission Equipment Group is worth CN¥6.62b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, China High Speed Transmission Equipment Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that China High Speed Transmission Equipment Group grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is China High Speed Transmission Equipment Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China High Speed Transmission Equipment Group 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. Considering the last three years, China High Speed Transmission Equipment Group actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Although China High Speed Transmission Equipment Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥2.96b. And it impressed us with its EBIT growth of 19% over the last year. So we don't have any problem with China High Speed Transmission Equipment Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with China High Speed Transmission Equipment Group .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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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