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Weichai Power (HKG:2338) Has A Pretty Healthy Balance Sheet

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Warren Buffett famously said, '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. We note that Weichai Power Co., Ltd. (HKG:2338) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Weichai Power

What Is Weichai Power's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Weichai Power had CN¥27.6b of debt in March 2019, down from CN¥39.1b, one year before. But it also has CN¥39.3b in cash to offset that, meaning it has CN¥11.7b net cash.

SEHK:2338 Historical Debt, July 30th 2019
SEHK:2338 Historical Debt, July 30th 2019

A Look At Weichai Power's Liabilities

The latest balance sheet data shows that Weichai Power had liabilities of CN¥96.4b due within a year, and liabilities of CN¥54.8b falling due after that. On the other hand, it had cash of CN¥39.3b and CN¥51.9b worth of receivables due within a year. So it has liabilities totalling CN¥60.0b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of CN¥96.0b, so it does suggest shareholders should keep an eye on Weichai Power's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Weichai Power boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Weichai Power grew its EBIT by 7.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Weichai Power'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Weichai Power 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. Over the last three years, Weichai Power actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Weichai Power'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¥12b. And it impressed us with free cash flow of CN¥18b, being 107% of its EBIT. So we don't have any problem with Weichai Power's use of debt. Given Weichai Power has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.