Shanghai Haohai Biological Technology (HKG:6826) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Shanghai Haohai Biological Technology Co., Ltd. (HKG:6826) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See 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 Shanghai Haohai Biological Technology had CN¥29.9m of debt in March 2022, down from CN¥108.1m, one year before. But on the other hand it also has CN¥2.71b in cash, leading to a CN¥2.68b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Shanghai Haohai Biological Technology had liabilities of CN¥425.2m due within 12 months and liabilities of CN¥410.3m due beyond that. Offsetting these obligations, it had cash of CN¥2.71b as well as receivables valued at CN¥432.6m due within 12 months. So it can boast CN¥2.31b more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai Haohai Biological Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shanghai Haohai Biological Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shanghai Haohai Biological Technology's load is not too heavy, because its EBIT was down 33% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanghai Haohai Biological Technology 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. While Shanghai Haohai Biological Technology 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. In the last three years, Shanghai Haohai Biological Technology's free cash flow amounted to 23% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Haohai Biological Technology has CN¥2.68b in net cash and a decent-looking balance sheet. So we are not troubled with Shanghai Haohai Biological Technology's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai Haohai Biological Technology's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.