Eagle Nice (International) Holdings (HKG:2368) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Eagle Nice (International) Holdings Limited (HKG:2368) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Eagle Nice (International) Holdings

What Is Eagle Nice (International) Holdings's Debt?

The image below, which you can click on for greater detail, shows that Eagle Nice (International) Holdings had debt of HK$372.9m at the end of September 2020, a reduction from HK$496.7m over a year. However, because it has a cash reserve of HK$371.3m, its net debt is less, at about HK$1.52m.

How Healthy Is Eagle Nice (International) Holdings's Balance Sheet?

According to the last reported balance sheet, Eagle Nice (International) Holdings had liabilities of HK$923.2m due within 12 months, and liabilities of HK$67.2m due beyond 12 months. On the other hand, it had cash of HK$371.3m and HK$643.4m worth of receivables due within a year. So it actually has HK$24.4m more liquid assets than total liabilities.

Having regard to Eagle Nice (International) Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$2.02b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Eagle Nice (International) Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With debt at a measly 0.0035 times EBITDA and EBIT covering interest a whopping 51.8 times, it's clear that Eagle Nice (International) Holdings is not a desperate borrower. So relative to past earnings, the debt load seems trivial. Another good sign is that Eagle Nice (International) Holdings has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Eagle Nice (International) Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Eagle Nice (International) Holdings recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Eagle Nice (International) Holdings's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks Eagle Nice (International) Holdings has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. 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, we've discovered 1 warning sign for Eagle Nice (International) Holdings that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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