Haidilao International Holding (HKG:6862) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies Haidilao International Holding Ltd. (HKG:6862) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Haidilao International Holding

What Is Haidilao International Holding's Debt?

The image below, which you can click on for greater detail, shows that Haidilao International Holding had debt of CN¥2.76b at the end of December 2023, a reduction from CN¥4.68b over a year. However, its balance sheet shows it holds CN¥11.4b in cash, so it actually has CN¥8.61b net cash.

How Strong Is Haidilao International Holding's Balance Sheet?

According to the last reported balance sheet, Haidilao International Holding had liabilities of CN¥7.24b due within 12 months, and liabilities of CN¥5.92b due beyond 12 months. Offsetting these obligations, it had cash of CN¥11.4b as well as receivables valued at CN¥1.42b due within 12 months. So it has liabilities totalling CN¥380.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Haidilao International Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥105.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Haidilao International Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Haidilao International Holding grew its EBIT by 163% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Haidilao International Holding 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. Haidilao International Holding 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. Happily for any shareholders, Haidilao International Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Haidilao International Holding has CN¥8.61b in net cash. The cherry on top was that in converted 158% of that EBIT to free cash flow, bringing in CN¥8.5b. So is Haidilao International Holding's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Haidilao International Holding that you should be aware of.

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. 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.