MeiHua Holdings GroupLtd (SHSE:600873) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that MeiHua Holdings Group Co.,Ltd (SHSE:600873) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MeiHua Holdings GroupLtd

What Is MeiHua Holdings GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that MeiHua Holdings GroupLtd had debt of CN¥4.08b at the end of December 2023, a reduction from CN¥5.01b over a year. However, it does have CN¥5.24b in cash offsetting this, leading to net cash of CN¥1.17b.

A Look At MeiHua Holdings GroupLtd's Liabilities

The latest balance sheet data shows that MeiHua Holdings GroupLtd had liabilities of CN¥6.53b due within a year, and liabilities of CN¥2.47b falling due after that. Offsetting these obligations, it had cash of CN¥5.24b as well as receivables valued at CN¥1.07b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.69b.

Since publicly traded MeiHua Holdings GroupLtd shares are worth a total of CN¥30.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, MeiHua Holdings GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that MeiHua Holdings GroupLtd's load is not too heavy, because its EBIT was down 29% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MeiHua Holdings GroupLtd can strengthen its balance sheet over time. 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 MeiHua Holdings GroupLtd 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, MeiHua Holdings GroupLtd recorded free cash flow worth a fulsome 96% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that MeiHua Holdings GroupLtd has CN¥1.17b in net cash. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in CN¥3.9b. So we are not troubled with MeiHua Holdings GroupLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with MeiHua Holdings GroupLtd , and understanding them should be part of your investment process.

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.