Haitian International Holdings (HKG:1882) Seems To Use Debt Quite Sensibly

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.' 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, Haitian International Holdings Limited (HKG:1882) does carry debt. But is this debt a concern to shareholders?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Haitian International Holdings

What Is Haitian International Holdings's Net Debt?

As you can see below, at the end of December 2023, Haitian International Holdings had CN¥2.75b of debt, up from CN¥1.44b a year ago. Click the image for more detail. However, it does have CN¥11.2b in cash offsetting this, leading to net cash of CN¥8.43b.

How Strong Is Haitian International Holdings' Balance Sheet?

The latest balance sheet data shows that Haitian International Holdings had liabilities of CN¥7.50b due within a year, and liabilities of CN¥2.75b falling due after that. Offsetting this, it had CN¥11.2b in cash and CN¥3.43b in receivables that were due within 12 months. So it actually has CN¥4.36b 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.

Fortunately, Haitian International Holdings grew its EBIT by 8.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Haitian International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Haitian International Holdings recorded free cash flow worth 53% 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¥8.43b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 8.4% in the last twelve months. So is Haitian International Holdings's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Haitian International Holdings insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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. 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.