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.' 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 Haidilao International Holding Ltd. (HKG:6862) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Haidilao International Holding

How Much Debt Does Haidilao International Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Haidilao International Holding had CN¥2.35b of debt in June 2024, down from CN¥3.15b, one year before. However, it does have CN¥14.1b in cash offsetting this, leading to net cash of CN¥11.7b.

How Strong Is Haidilao International Holding's Balance Sheet?

We can see from the most recent balance sheet that Haidilao International Holding had liabilities of CN¥10.4b falling due within a year, and liabilities of CN¥5.42b due beyond that. On the other hand, it had cash of CN¥14.1b and CN¥942.1m worth of receivables due within a year. So it has liabilities totalling CN¥799.0m more than its cash and near-term receivables, combined.

Having regard to Haidilao International Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥62.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Haidilao International Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Haidilao International Holding has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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.

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 generation warms our hearts like a puppy in a bumblebee suit.

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¥11.7b. The cherry on top was that in converted 182% of that EBIT to free cash flow, bringing in CN¥8.5b. So we don't think Haidilao International Holding's use of debt is risky. 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. For example - Haidilao International Holding has 1 warning sign we think you should be aware of.

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.