These 4 Measures Indicate That Haitian International Holdings (HKG:1882) Is Using Debt Reasonably Well

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

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Haitian International Holdings had CN¥2.75b of debt, an increase on CN¥2.25b, over one year. However, its balance sheet shows it holds CN¥10.2b in cash, so it actually has CN¥7.41b net cash.

A Look At Haitian International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Haitian International Holdings had liabilities of CN¥7.24b due within 12 months and liabilities of CN¥2.96b due beyond that. Offsetting these obligations, it had cash of CN¥10.2b as well as receivables valued at CN¥3.23b due within 12 months. So it actually has CN¥3.19b 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.

On the other hand, Haitian International Holdings's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥7.41b, as well as more liquid assets than liabilities. So we are not troubled with Haitian International Holdings's debt use. 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.