Is Human Health Holdings (HKG:1419) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Human Health Holdings Limited (HKG:1419) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Human Health Holdings

What Is Human Health Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Human Health Holdings had HK$13.6m of debt in December 2020, down from HK$17.5m, one year before. However, it does have HK$136.6m in cash offsetting this, leading to net cash of HK$123.0m.

How Strong Is Human Health Holdings' Balance Sheet?

The latest balance sheet data shows that Human Health Holdings had liabilities of HK$142.6m due within a year, and liabilities of HK$21.9m falling due after that. On the other hand, it had cash of HK$136.6m and HK$52.6m worth of receivables due within a year. So it can boast HK$24.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Human Health Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Human Health Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Human Health Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Human Health Holdings made a loss at the EBIT level, and saw its revenue drop to HK$430m, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is Human Health Holdings?

Although Human Health Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$59m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 2 warning signs for Human Health Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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