Is Haitian International Holdings (HKG:1882) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Haitian International Holdings Limited (HKG:1882) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Haitian International Holdings

What Is Haitian International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Haitian International Holdings had debt of CN¥1.32b, up from CN¥1.02b in one year. However, its balance sheet shows it holds CN¥8.61b in cash, so it actually has CN¥7.29b net cash.

How Healthy Is Haitian International Holdings' Balance Sheet?

According to the last reported balance sheet, Haitian International Holdings had liabilities of CN¥8.17b due within 12 months, and liabilities of CN¥438.7m due beyond 12 months. Offsetting this, it had CN¥8.61b in cash and CN¥3.48b in receivables that were due within 12 months. So it can boast CN¥3.49b 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. 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.

On top of that, Haitian International Holdings grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Haitian International Holdings can strengthen its balance sheet over time. 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. During the last three years, Haitian International Holdings generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Haitian International Holdings has CN¥7.29b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥2.4b. So we don't think Haitian International Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Haitian International Holdings has 2 warning signs we think you should be aware of.

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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