Haitian International Holdings (HKG:1882) Could Easily Take On More Debt

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.' 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 Haitian International Holdings Limited (HKG:1882) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Haitian International Holdings

What Is Haitian International Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Haitian International Holdings had debt of CN¥1.24b, up from CN¥999.2m in one year. However, it does have CN¥7.57b in cash offsetting this, leading to net cash of CN¥6.33b.

How Strong Is Haitian International Holdings's Balance Sheet?

We can see from the most recent balance sheet that Haitian International Holdings had liabilities of CN¥6.29b falling due within a year, and liabilities of CN¥368.1m due beyond that. On the other hand, it had cash of CN¥7.57b and CN¥2.61b worth of receivables due within a year. So it can boast CN¥3.52b more liquid assets than total liabilities.

This short term liquidity is a sign that Haitian International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Haitian International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Haitian International Holdings grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Haitian International Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Haitian 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. Over the most recent three years, Haitian International Holdings recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Haitian International Holdings has net cash of CN¥6.33b, as well as more liquid assets than liabilities. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in CN¥2.2b. So is Haitian International Holdings's debt a risk? It doesn't seem so to us. We'd be very excited to see if Haitian International Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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