Renrui Human Resources Technology Holdings (HKG:6919) Seems To Use Debt Rather Sparingly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Renrui Human Resources Technology Holdings Limited (HKG:6919) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Renrui Human Resources Technology Holdings

What Is Renrui Human Resources Technology Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Renrui Human Resources Technology Holdings had debt of CN¥136.2m, up from none in one year. However, it does have CN¥335.7m in cash offsetting this, leading to net cash of CN¥199.5m.

A Look At Renrui Human Resources Technology Holdings' Liabilities

We can see from the most recent balance sheet that Renrui Human Resources Technology Holdings had liabilities of CN¥649.4m falling due within a year, and liabilities of CN¥25.6m due beyond that. On the other hand, it had cash of CN¥335.7m and CN¥1.17b worth of receivables due within a year. So it actually has CN¥829.7m more liquid assets than total liabilities.

This surplus strongly suggests that Renrui Human Resources Technology Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Renrui Human Resources Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Renrui Human Resources Technology Holdings grew its EBIT by 313% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Renrui Human Resources Technology 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, a company can only pay off debt with cold hard cash, not accounting profits. Renrui Human Resources Technology 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, Renrui Human Resources Technology Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Renrui Human Resources Technology Holdings has CN¥199.5m in net cash and a strong balance sheet. And we liked the look of last year's 313% year-on-year EBIT growth. So we don't think Renrui Human Resources Technology Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Renrui Human Resources Technology Holdings , and understanding them should be part of your investment process.

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.