Is Haitian International Holdings (HKG:1882) using too much debt?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Haitian International Holdings Limited (HKG:1882) is in debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Haitian International Holdings

What is the net debt of Haitian International Holdings?

The image below, which you can click on for more details, shows that in June 2022, Haitian International Holdings had a debt of CN¥2.25b, compared to CN¥1.34b in one year. But on the other hand, it also has 10.1 billion Canadian yen in cash, which translates to a net cash position of 7.86 billion domestic yen.

SEHK: 1882 Debt to Equity August 19, 2022

How healthy is Haitian International Holdings’ balance sheet?

We can see from the most recent balance sheet that Haitian International Holdings had liabilities of 8.51 billion yen due within one year, and liabilities of 493.2 million yen due beyond that. In compensation for these obligations, it had cash of 10.1 billion yen as well as receivables valued at 2.77 billion yen due within 12 months. He can therefore boast of having 3.87 billion yen more in liquid assets than total Passives.

It’s good to see that Haitian International Holdings has plenty of cash on its balance sheet, suggesting conservative liability management. Given that he has easily sufficient short-term cash, we don’t think he will have any problems with his lenders. Simply put, the fact that Haitian International Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.

On the other hand, the EBIT of Haitian International Holdings has fallen by 10% over the last year. If this rate of decline in profits continues, the company could find itself in a difficult situation. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Haitian International Holdings’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Haitian International Holdings has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it is growing. builds (or erodes) cash balance. Over the past three years, Haitian International Holdings has recorded free cash flow of 71% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Summary

While it’s always a good idea to investigate a company’s debt, in this case Haitian International Holdings has 7.86 billion yen of net cash and a decent balance sheet. The icing on the cake was converting 71% of that EBIT into free cash flow, which brought in 1.4 billion Canadian yen. So is Haitian International Holdings’ debt a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 1 warning sign we spotted with Haitian International Holdings.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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