We Think Haier Smart Home (SHSE:600690) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Haier Smart Home Co., Ltd. (SHSE:600690) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Haier Smart Home

What Is Haier Smart Home's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Haier Smart Home had debt of CN¥28.4b, up from CN¥27.3b in one year. But on the other hand it also has CN¥54.5b in cash, leading to a CN¥26.0b net cash position.

How Healthy Is Haier Smart Home's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Haier Smart Home had liabilities of CN¥119.6b due within 12 months and liabilities of CN¥28.2b due beyond that. Offsetting these obligations, it had cash of CN¥54.5b as well as receivables valued at CN¥35.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥58.3b.

While this might seem like a lot, it is not so bad since Haier Smart Home has a huge market capitalization of CN¥262.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Haier Smart Home boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Haier Smart Home grew its EBIT by 18% last year, making its debt load easier to handle. 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 Haier Smart Home'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 Haier Smart Home 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, Haier Smart Home recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Haier Smart Home does have more liabilities than liquid assets, it also has net cash of CN¥26.0b. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in CN¥15b. So is Haier Smart Home's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Haier Smart Home, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com