These 4 Measures Indicate That Henan Shuanghui Investment & DevelopmentLtd (SZSE:000895) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Henan Shuanghui Investment & Development Co.,Ltd. (SZSE:000895) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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.

See our latest analysis for Henan Shuanghui Investment & DevelopmentLtd

How Much Debt Does Henan Shuanghui Investment & DevelopmentLtd Carry?

As you can see below, at the end of March 2024, Henan Shuanghui Investment & DevelopmentLtd had CN¥12.0b of debt, up from CN¥11.0b a year ago. Click the image for more detail. However, it does have CN¥9.55b in cash offsetting this, leading to net debt of about CN¥2.46b.

A Look At Henan Shuanghui Investment & DevelopmentLtd's Liabilities

The latest balance sheet data shows that Henan Shuanghui Investment & DevelopmentLtd had liabilities of CN¥17.6b due within a year, and liabilities of CN¥1.38b falling due after that. Offsetting these obligations, it had cash of CN¥9.55b as well as receivables valued at CN¥987.6m due within 12 months. So it has liabilities totalling CN¥8.43b more than its cash and near-term receivables, combined.

Given Henan Shuanghui Investment & DevelopmentLtd has a humongous market capitalization of CN¥86.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Henan Shuanghui Investment & DevelopmentLtd has a low debt to EBITDA ratio of only 0.31. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. But the other side of the story is that Henan Shuanghui Investment & DevelopmentLtd saw its EBIT decline by 5.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Henan Shuanghui Investment & DevelopmentLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Henan Shuanghui Investment & DevelopmentLtd recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that Henan Shuanghui Investment & DevelopmentLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its EBIT growth rate does undermine this impression a bit. All these things considered, it appears that Henan Shuanghui Investment & DevelopmentLtd can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Henan Shuanghui Investment & DevelopmentLtd is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.