Shanghai Haohai Biological Technology (HKG:6826) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shanghai Haohai Biological Technology

What Is Shanghai Haohai Biological Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Shanghai Haohai Biological Technology had debt of CN¥353.8m, up from CN¥57.0m in one year. However, it does have CN¥2.76b in cash offsetting this, leading to net cash of CN¥2.41b.

A Look At Shanghai Haohai Biological Technology's Liabilities

The latest balance sheet data shows that Shanghai Haohai Biological Technology had liabilities of CN¥716.0m due within a year, and liabilities of CN¥372.3m falling due after that. On the other hand, it had cash of CN¥2.76b and CN¥375.4m worth of receivables due within a year. 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.

Even more impressive was the fact that Shanghai Haohai Biological Technology grew its EBIT by 132% over twelve months. That boost will make it even easier to pay down debt going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 45% 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¥2.41b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 132% over the last year. So is Shanghai Haohai Biological Technology's debt a risk? It doesn't seem so to us. 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.

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.