MeiHua Holdings GroupLtd (SHSE:600873) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, MeiHua Holdings Group Co.,Ltd (SHSE:600873) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 MeiHua Holdings GroupLtd

What Is MeiHua Holdings GroupLtd's Debt?

As you can see below, MeiHua Holdings GroupLtd had CN¥3.82b of debt at September 2024, down from CN¥4.08b a year prior. But it also has CN¥5.65b in cash to offset that, meaning it has CN¥1.84b net cash.

How Strong Is MeiHua Holdings GroupLtd's Balance Sheet?

According to the last reported balance sheet, MeiHua Holdings GroupLtd had liabilities of CN¥7.27b due within 12 months, and liabilities of CN¥1.55b due beyond 12 months. Offsetting this, it had CN¥5.65b in cash and CN¥821.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.34b.

Since publicly traded MeiHua Holdings GroupLtd shares are worth a total of CN¥26.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, MeiHua Holdings GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, MeiHua Holdings GroupLtd's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MeiHua Holdings GroupLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While MeiHua Holdings 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. During the last three years, MeiHua Holdings GroupLtd generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MeiHua Holdings GroupLtd has CN¥1.84b in net cash. And it impressed us with free cash flow of CN¥2.7b, being 94% of its EBIT. So we are not troubled with MeiHua Holdings GroupLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that MeiHua Holdings GroupLtd 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.