Here's Why Smoore International Holdings (HKG:6969) Can Manage Its Debt Responsibly

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. Importantly, Smoore International Holdings Limited (HKG:6969) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Smoore International Holdings

What Is Smoore International Holdings's Debt?

As you can see below, at the end of December 2023, Smoore International Holdings had CN¥393.0m of debt, up from CN¥101.7m a year ago. Click the image for more detail. However, it does have CN¥16.2b in cash offsetting this, leading to net cash of CN¥15.8b.

How Strong Is Smoore International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Smoore International Holdings had liabilities of CN¥3.57b falling due within a year, and liabilities of CN¥532.3m due beyond that. Offsetting these obligations, it had cash of CN¥16.2b as well as receivables valued at CN¥2.62b due within 12 months. So it can boast CN¥14.7b more liquid assets than total liabilities.

This excess liquidity is a great indication that Smoore International Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Smoore International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Smoore International Holdings's load is not too heavy, because its EBIT was down 39% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Smoore International Holdings's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Smoore International Holdings 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. Over the last three years, Smoore International Holdings reported free cash flow worth 4.1% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Smoore International Holdings has CN¥15.8b in net cash and a decent-looking balance sheet. So we don't have any problem with Smoore International Holdings's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Smoore International Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.