Does Huashi Group Holdings (HKG:1111) Have A Healthy 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. We note that Huashi Group Holdings Limited (HKG:1111) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Huashi Group Holdings

What Is Huashi Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Huashi Group Holdings had debt of CN¥118.9m, up from CN¥37.9m in one year. However, its balance sheet shows it holds CN¥172.1m in cash, so it actually has CN¥53.1m net cash.

A Look At Huashi Group Holdings' Liabilities

The latest balance sheet data shows that Huashi Group Holdings had liabilities of CN¥206.6m due within a year, and liabilities of CN¥24.8m falling due after that. On the other hand, it had cash of CN¥172.1m and CN¥244.3m worth of receivables due within a year. So it actually has CN¥185.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Huashi Group Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Huashi Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Huashi Group Holdings grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Huashi Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Huashi Group Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Huashi Group Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Huashi Group Holdings has net cash of CN¥53.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 51% over the last year. So we don't think Huashi Group Holdings's use of debt is risky. 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. We've identified 2 warning signs with Huashi Group Holdings (at least 1 which makes us a bit uncomfortable) , 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.