Huabao International Holdings (HKG:336) Has A Rock Solid Balance Sheet

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 Huabao International Holdings Limited (HKG:336) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Huabao International Holdings

What Is Huabao International Holdings's Net Debt?

As you can see below, Huabao International Holdings had CN¥1.86b of debt at June 2021, down from CN¥2.86b a year prior. However, its balance sheet shows it holds CN¥5.96b in cash, so it actually has CN¥4.10b net cash.

A Look At Huabao International Holdings' Liabilities

According to the last reported balance sheet, Huabao International Holdings had liabilities of CN¥2.03b due within 12 months, and liabilities of CN¥902.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.96b as well as receivables valued at CN¥1.10b due within 12 months. So it can boast CN¥4.13b more liquid assets than total liabilities.

This short term liquidity is a sign that Huabao International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Huabao International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Huabao International Holdings saw its EBIT drop by 3.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Huabao International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Huabao 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. During the last three years, Huabao International Holdings generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Huabao International Holdings has CN¥4.10b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.2b, being 86% of its EBIT. So is Huabao International Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Huabao International Holdings , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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