Is Human Health Holdings (HKG:1419) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Human Health Holdings

What Is Human Health Holdings's Debt?

As you can see below, at the end of June 2020, Human Health Holdings had HK$15.6m of debt, up from HK$9.49m a year ago. Click the image for more detail. But on the other hand it also has HK$128.2m in cash, leading to a HK$112.6m net cash position.

How Strong Is Human Health Holdings's Balance Sheet?

We can see from the most recent balance sheet that Human Health Holdings had liabilities of HK$129.7m falling due within a year, and liabilities of HK$39.2m due beyond that. Offsetting this, it had HK$128.2m in cash and HK$45.4m in receivables that were due within 12 months. So it can boast HK$4.64m more liquid assets than total liabilities.

Having regard to Human Health Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$235.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Human Health Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Human Health Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Human Health Holdings had a loss before interest and tax, and actually shrunk its revenue by 14%, to HK$454m. 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$26m. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Human Health Holdings (of which 1 is potentially serious!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you decide to trade Human Health Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.