Is Haoxiangni Health FoodLtd (SZSE:002582) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Haoxiangni Health Food Co.,Ltd. (SZSE:002582) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Haoxiangni Health FoodLtd

What Is Haoxiangni Health FoodLtd's Debt?

As you can see below, at the end of September 2024, Haoxiangni Health FoodLtd had CN¥772.1m of debt, up from CN¥605.6m a year ago. Click the image for more detail. But it also has CN¥1.56b in cash to offset that, meaning it has CN¥789.7m net cash.

How Healthy Is Haoxiangni Health FoodLtd's Balance Sheet?

According to the last reported balance sheet, Haoxiangni Health FoodLtd had liabilities of CN¥665.2m due within 12 months, and liabilities of CN¥576.5m due beyond 12 months. On the other hand, it had cash of CN¥1.56b and CN¥113.3m worth of receivables due within a year. So it can boast CN¥433.4m more liquid assets than total liabilities.

This surplus suggests that Haoxiangni Health FoodLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Haoxiangni Health FoodLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Haoxiangni Health FoodLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Haoxiangni Health FoodLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to CN¥1.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Haoxiangni Health FoodLtd?

Although Haoxiangni Health FoodLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥168m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 2 warning signs for Haoxiangni Health FoodLtd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.