Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk that worries me … and every investor practices that I know worries “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Ever Harvest Group Holdings Limited (HKG: 1549) uses debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Ever Harvest Group Holdings
What is the debt of Ever Harvest Group Holdings?
You can click on the graph below for historical figures, but it shows that as of December 2020, Ever Harvest Group Holdings had a debt of HK $ 45.3million, an increase from HK $ 38.5million. HK $, over one year. However, he has HK $ 118.5million in cash offsetting this, leading to net cash of HK $ 73.3million.
How strong is Ever Harvest Group Holdings’ balance sheet?
The latest balance sheet data shows Ever Harvest Group Holdings had a liability of HK $ 203.5 million due within a year, and a liability of HK $ 1.99 million due thereafter. On the other hand, he had HK $ 118.5 million in cash and HK $ 54.3 million in receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by HK $ 32.7 million.
Considering that Ever Harvest Group Holdings has a market capitalization of HK $ 315.0 million, it is hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While it has some liabilities to note, Ever Harvest Group Holdings also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Notably, Ever Harvest Group Holdings recorded a loss in EBIT level last year, but improved it to a positive EBIT of HK $ 298,000 in the past twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Ever Harvest Group Holdings will need revenue to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, while the tax authorities love accounting profits, lenders only accept hard cash. Ever Harvest Group Holdings may have net cash on the balance sheet, but it’s always interesting to consider how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs. in its ability to manage debt. Fortunately for all shareholders, Ever Harvest Group Holdings actually generated more free cash flow than EBIT over the past year. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.
Although Ever Harvest Group Holdings has more liabilities than liquid assets, it also has net cash of HK $ 73.3 million. The icing on the cake is that he converted 14.621% of that EBIT into free cash flow, bringing in HK $ 44 million. We are therefore not concerned with the use of debt by Ever Harvest Group Holdings. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 4 warning signs for Ever Harvest Group Holdings (1 is a little worrying) you should be aware of.
At the end of the day, it’s often best to focus on businesses that aren’t in debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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