We Think Hangzhou Haoyue Personal Care (SHSE:605009) Can Stay On Top Of Its Debt

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. We can see that Hangzhou Haoyue Personal Care Co., Ltd (SHSE:605009) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Hangzhou Haoyue Personal Care

How Much Debt Does Hangzhou Haoyue Personal Care Carry?

As you can see below, at the end of June 2024, Hangzhou Haoyue Personal Care had CN¥335.2m of debt, up from CN¥300.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.51b in cash, so it actually has CN¥1.18b 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¥1.08b due within 12 months and liabilities of CN¥144.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.51b as well as receivables valued at CN¥206.6m due within 12 months. So it can boast CN¥498.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou Haoyue Personal Care could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hangzhou Haoyue Personal Care has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Hangzhou Haoyue Personal Care has increased its EBIT by 6.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hangzhou Haoyue Personal Care's ability to maintain a healthy balance sheet going forward. 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 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. During the last three years, Hangzhou Haoyue Personal Care produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. 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¥1.18b, as well as more liquid assets than liabilities. And it also grew its EBIT by 6.0% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Hangzhou Haoyue Personal Care (including 1 which is significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.