We Think Renrui Human Resources Technology Holdings (HKG:6919) Can Stay On Top Of Its Debt

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. 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?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out 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 December 2022 Renrui Human Resources Technology Holdings had debt of CN¥95.2m, up from CN¥5.02m in one year. However, it does have CN¥474.6m in cash offsetting this, leading to net cash of CN¥379.4m.

How Strong Is Renrui Human Resources Technology Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Renrui Human Resources Technology Holdings had liabilities of CN¥641.1m due within 12 months and liabilities of CN¥37.2m due beyond that. On the other hand, it had cash of CN¥474.6m and CN¥955.9m worth of receivables due within a year. So it can boast CN¥752.2m 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). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Renrui Human Resources Technology Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Renrui Human Resources Technology Holdings's load is not too heavy, because its EBIT was down 56% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Renrui Human Resources Technology Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Renrui Human Resources Technology Holdings recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Renrui Human Resources Technology Holdings has CN¥379.4m in net cash and a strong balance sheet. So we are not troubled with Renrui Human Resources Technology Holdings's debt use. 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. Be aware that Renrui Human Resources Technology Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.