Does HUANLEJIA Food GroupLtd (SZSE:300997) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, HUANLEJIA Food Group CO.,Ltd (SZSE:300997) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for HUANLEJIA Food GroupLtd

What Is HUANLEJIA Food GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 HUANLEJIA Food GroupLtd had CN¥271.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥445.0m in cash, so it actually has CN¥173.8m net cash.

A Look At HUANLEJIA Food GroupLtd's Liabilities

According to the last reported balance sheet, HUANLEJIA Food GroupLtd had liabilities of CN¥797.5m due within 12 months, and liabilities of CN¥41.7m due beyond 12 months. Offsetting this, it had CN¥445.0m in cash and CN¥161.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥232.3m.

Of course, HUANLEJIA Food GroupLtd has a market capitalization of CN¥5.96b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, HUANLEJIA Food GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact HUANLEJIA Food GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 27% in the last twelve months. 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 HUANLEJIA Food 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While HUANLEJIA Food 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. Looking at the most recent three years, HUANLEJIA Food GroupLtd recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that HUANLEJIA Food GroupLtd has CN¥173.8m in net cash. So we don't have any problem with HUANLEJIA Food GroupLtd's use of debt. 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. Be aware that HUANLEJIA Food GroupLtd is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.