Is Haitian International Holdings (HKG:1882) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Haitian International Holdings Limited (HKG:1882) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Our free stock report includes 1 warning sign investors should be aware of before investing in Haitian International Holdings. Read for free now.

Why Does Debt Bring Risk?

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. 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. 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.

How Much Debt Does Haitian International Holdings Carry?

The image below, which you can click on for greater detail, shows that Haitian International Holdings had debt of CN¥2.01b at the end of December 2024, a reduction from CN¥2.75b over a year. But on the other hand it also has CN¥8.68b in cash, leading to a CN¥6.67b net cash position.

A Look At Haitian International Holdings' Liabilities

The latest balance sheet data shows that Haitian International Holdings had liabilities of CN¥7.91b due within a year, and liabilities of CN¥2.37b falling due after that. Offsetting these obligations, it had cash of CN¥8.68b as well as receivables valued at CN¥4.20b due within 12 months. So it can boast CN¥2.61b more liquid assets than total liabilities.

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

See our latest analysis for Haitian International Holdings

Also positive, Haitian International Holdings grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Haitian International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Haitian International Holdings's free cash flow amounted to 25% 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 Haitian International Holdings has net cash of CN¥6.67b, as well as more liquid assets than liabilities. And we liked the look of last year's 25% year-on-year EBIT growth. So is Haitian International Holdings's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Haitian International Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.