Haidilao International Holding (HKG:6862) Seems To Use Debt Rather Sparingly

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.' 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. We note that Haidilao International Holding Ltd. (HKG:6862) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Haidilao International Holding

What Is Haidilao International Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Haidilao International Holding had CN¥3.15b of debt in June 2023, down from CN¥7.03b, one year before. However, its balance sheet shows it holds CN¥9.95b in cash, so it actually has CN¥6.80b net cash.

How Healthy Is Haidilao International Holding's Balance Sheet?

We can see from the most recent balance sheet that Haidilao International Holding had liabilities of CN¥7.58b falling due within a year, and liabilities of CN¥6.23b due beyond that. Offsetting this, it had CN¥9.95b in cash and CN¥1.07b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.78b more than its cash and near-term receivables, combined.

Given Haidilao International Holding has a humongous market capitalization of CN¥107.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Haidilao International Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Haidilao International Holding grew its EBIT by 813% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Haidilao International Holding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Haidilao International Holding 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 last three years, Haidilao International Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Haidilao International Holding's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.80b. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in CN¥8.1b. So is Haidilao International Holding's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Haidilao International Holding's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.