Is Haina Intelligent Equipment International Holdings (HKG:1645) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Haina Intelligent Equipment International Holdings Limited (HKG:1645) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Haina Intelligent Equipment International Holdings

What Is Haina Intelligent Equipment International Holdings's Net Debt?

As you can see below, at the end of June 2022, Haina Intelligent Equipment International Holdings had CN¥30.0m of debt, up from CN¥19.5m a year ago. Click the image for more detail. However, it does have CN¥116.6m in cash offsetting this, leading to net cash of CN¥86.6m.

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

We can see from the most recent balance sheet that Haina Intelligent Equipment International Holdings had liabilities of CN¥235.0m falling due within a year, and liabilities of CN¥13.1m due beyond that. On the other hand, it had cash of CN¥116.6m and CN¥97.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥33.6m.

Of course, Haina Intelligent Equipment International Holdings has a market capitalization of CN¥381.3m, so these liabilities are probably manageable. 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, Haina Intelligent Equipment International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Haina Intelligent Equipment International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Haina Intelligent Equipment International Holdings had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥392m. That's not what we would hope to see.

So How Risky Is Haina Intelligent Equipment International Holdings?

Although Haina Intelligent Equipment International Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥4.3m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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.

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