Is Shanghai Haohai Biological Technology (HKG:6826) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shanghai Haohai Biological Technology Co., Ltd. (HKG:6826) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Shanghai Haohai Biological Technology

What Is Shanghai Haohai Biological Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shanghai Haohai Biological Technology had CN¥245.0m of debt, an increase on CN¥57.0m, over one year. However, it does have CN¥2.67b in cash offsetting this, leading to net cash of CN¥2.42b.

How Healthy Is Shanghai Haohai Biological Technology's Balance Sheet?

The latest balance sheet data shows that Shanghai Haohai Biological Technology had liabilities of CN¥580.1m due within a year, and liabilities of CN¥431.0m falling due after that. Offsetting this, it had CN¥2.67b in cash and CN¥390.6m in receivables that were due within 12 months. So it actually has CN¥2.05b more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Haohai Biological Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai Haohai Biological Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Shanghai Haohai Biological Technology grew its EBIT by 110% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanghai Haohai Biological Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Haohai Biological Technology 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. In the last three years, Shanghai Haohai Biological Technology's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Haohai Biological Technology has net cash of CN¥2.42b, as well as more liquid assets than liabilities. And we liked the look of last year's 110% year-on-year EBIT growth. So is Shanghai Haohai Biological Technology's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Shanghai Haohai Biological Technology, 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.