Does Hangzhou Haoyue Personal Care (SHSE:605009) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Hangzhou Haoyue Personal Care Co., Ltd (SHSE:605009) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hangzhou Haoyue Personal Care

What Is Hangzhou Haoyue Personal Care's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Hangzhou Haoyue Personal Care had debt of CN¥270.2m, up from CN¥190.0m in one year. But it also has CN¥2.01b in cash to offset that, meaning it has CN¥1.74b net cash.

How Healthy Is Hangzhou Haoyue Personal Care's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hangzhou Haoyue Personal Care had liabilities of CN¥1.04b due within 12 months and liabilities of CN¥148.1m due beyond that. Offsetting these obligations, it had cash of CN¥2.01b as well as receivables valued at CN¥295.0m due within 12 months. So it actually has CN¥1.11b more liquid assets than total liabilities.

It's good to see that Hangzhou Haoyue Personal Care has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Hangzhou Haoyue Personal Care boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Hangzhou Haoyue Personal Care grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hangzhou Haoyue Personal Care 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. While Hangzhou Haoyue Personal Care 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 most recent three years, Hangzhou Haoyue Personal Care recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Haoyue Personal Care has net cash of CN¥1.74b, as well as more liquid assets than liabilities. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in CN¥378m. So we don't think Hangzhou Haoyue Personal Care's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Hangzhou Haoyue Personal Care .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.