Huabao Flavours & Fragrances (SZSE:300741) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Huabao Flavours & Fragrances Co., Ltd. (SZSE:300741) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Huabao Flavours & Fragrances

How Much Debt Does Huabao Flavours & Fragrances Carry?

You can click the graphic below for the historical numbers, but it shows that Huabao Flavours & Fragrances had CN¥166.5m of debt in September 2024, down from CN¥268.0m, one year before. But on the other hand it also has CN¥4.75b in cash, leading to a CN¥4.59b net cash position.

How Strong Is Huabao Flavours & Fragrances' Balance Sheet?

The latest balance sheet data shows that Huabao Flavours & Fragrances had liabilities of CN¥484.0m due within a year, and liabilities of CN¥201.5m falling due after that. Offsetting these obligations, it had cash of CN¥4.75b as well as receivables valued at CN¥456.4m due within 12 months. So it actually has CN¥4.52b more liquid assets than total liabilities.

This surplus liquidity suggests that Huabao Flavours & Fragrances' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Huabao Flavours & Fragrances has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Huabao Flavours & Fragrances's saving grace is its low debt levels, because its EBIT has tanked 72% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Huabao Flavours & Fragrances's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Huabao Flavours & Fragrances 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 last three years, Huabao Flavours & Fragrances actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Huabao Flavours & Fragrances has CN¥4.59b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in CN¥467m. So we don't think Huabao Flavours & Fragrances's use of debt is risky. 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. Case in point: We've spotted 4 warning signs for Huabao Flavours & Fragrances you should be aware of, and 1 of them is significant.

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.