Here's Why China Haisheng Juice Holdings (HKG:359) Is Weighed Down By Its Debt Load

Warren Buffett famously said, '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 China Haisheng Juice Holdings Co., Ltd (HKG:359) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Haisheng Juice Holdings

What Is China Haisheng Juice Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 China Haisheng Juice Holdings had debt of CN¥4.97b, up from CN¥3.60b in one year. However, it also had CN¥226.3m in cash, and so its net debt is CN¥4.75b.

A Look At China Haisheng Juice Holdings' Liabilities

The latest balance sheet data shows that China Haisheng Juice Holdings had liabilities of CN¥4.03b due within a year, and liabilities of CN¥4.48b falling due after that. Offsetting this, it had CN¥226.3m in cash and CN¥530.4m in receivables that were due within 12 months. So its liabilities total CN¥7.75b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥92.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, China Haisheng Juice Holdings would probably need a major re-capitalization if its creditors were to demand repayment.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

China Haisheng Juice Holdings shareholders face the double whammy of a high net debt to EBITDA ratio (27.9), and fairly weak interest coverage, since EBIT is just 0.66 times the interest expense. The debt burden here is substantial. Investors should also be troubled by the fact that China Haisheng Juice Holdings saw its EBIT drop by 16% over the last twelve months. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Haisheng Juice 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, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, China Haisheng Juice Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both China Haisheng Juice Holdings's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And even its net debt to EBITDA fails to inspire much confidence. It looks to us like China Haisheng Juice Holdings carries a significant balance sheet burden. If you harvest honey without a bee suit, you risk getting stung, so we'd probably stay away from this particular stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with China Haisheng Juice Holdings (including 2 which can't be ignored) .

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. 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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