We Think Huayu Expressway Group (HKG:1823) Can Manage Its Debt With Ease

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Huayu Expressway Group Limited (HKG:1823) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Huayu Expressway Group

What Is Huayu Expressway Group's Net Debt?

As you can see below, Huayu Expressway Group had CN¥50.0m of debt at June 2023, down from CN¥1.05b a year prior. But it also has CN¥424.5m in cash to offset that, meaning it has CN¥374.5m net cash.

How Strong Is Huayu Expressway Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Huayu Expressway Group had liabilities of CN¥135.5m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CN¥424.5m as well as receivables valued at CN¥31.4m due within 12 months. So it actually has CN¥320.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Huayu Expressway Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Huayu Expressway Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Huayu Expressway Group grew its EBIT by 369% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Huayu Expressway Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Huayu Expressway Group 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, Huayu Expressway Group 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 Huayu Expressway Group has CN¥374.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥147m, being 144% of its EBIT. At the end of the day we're not concerned about Huayu Expressway Group's debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Huayu Expressway Group you should be aware of.

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.