These 4 Measures Indicate That MeiHua Holdings GroupLtd (SHSE:600873) Is Using Debt Reasonably Well

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. Importantly, MeiHua Holdings Group Co.,Ltd (SHSE:600873) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MeiHua Holdings GroupLtd

What Is MeiHua Holdings GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that MeiHua Holdings GroupLtd had CN¥3.98b of debt in June 2024, down from CN¥4.81b, one year before. But it also has CN¥4.68b in cash to offset that, meaning it has CN¥697.9m 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¥6.58b due within 12 months, and liabilities of CN¥1.83b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.68b as well as receivables valued at CN¥777.4m due within 12 months. So it has liabilities totalling CN¥2.96b more than its cash and near-term receivables, combined.

Given MeiHua Holdings GroupLtd has a market capitalization of CN¥27.3b, it's hard to believe these liabilities pose much 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.

But the other side of the story is that MeiHua Holdings GroupLtd saw its EBIT decline by 9.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MeiHua Holdings GroupLtd's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, MeiHua Holdings GroupLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although MeiHua Holdings GroupLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥697.9m. And it impressed us with free cash flow of CN¥3.6b, being 100% of its EBIT. So we don't have any problem with MeiHua Holdings GroupLtd's use of debt. 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. Case in point: We've spotted 1 warning sign for MeiHua Holdings GroupLtd you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.