Haina Intelligent Equipment International Holdings (HKG:1645) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. As with many other companies Haina Intelligent Equipment International Holdings Limited (HKG:1645) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Haina Intelligent Equipment International Holdings

What Is Haina Intelligent Equipment International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Haina Intelligent Equipment International Holdings had CN¥19.5m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥249.4m in cash, so it actually has CN¥229.9m net cash.

How Healthy Is Haina Intelligent Equipment International Holdings' Balance Sheet?

The latest balance sheet data shows that Haina Intelligent Equipment International Holdings had liabilities of CN¥316.4m due within a year, and liabilities of CN¥17.8m falling due after that. On the other hand, it had cash of CN¥249.4m and CN¥108.4m worth of receivables due within a year. So it actually has CN¥23.6m more liquid assets than total liabilities.

This surplus suggests that Haina Intelligent Equipment International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Haina Intelligent Equipment International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Haina Intelligent Equipment International Holdings's load is not too heavy, because its EBIT was down 56% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Haina Intelligent Equipment International Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Haina Intelligent Equipment International Holdings 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. In the last three years, Haina Intelligent Equipment International Holdings's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Haina Intelligent Equipment International Holdings has net cash of CN¥229.9m, as well as more liquid assets than liabilities. So we are not troubled with Haina Intelligent Equipment International Holdings'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 Haina Intelligent Equipment International Holdings is showing 5 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.

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.

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