These 4 Measures Indicate That Shanghai Haohai Biological Technology (HKG:6826) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Shanghai Haohai Biological Technology Co., Ltd. (HKG:6826) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Haohai Biological Technology

What Is Shanghai Haohai Biological Technology's Debt?

The image below, which you can click on for greater detail, shows that Shanghai Haohai Biological Technology had debt of CN¥57.4m at the end of September 2022, a reduction from CN¥66.1m over a year. But on the other hand it also has CN¥2.60b in cash, leading to a CN¥2.55b net cash position.

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

The latest balance sheet data shows that Shanghai Haohai Biological Technology had liabilities of CN¥541.6m due within a year, and liabilities of CN¥437.6m falling due after that. On the other hand, it had cash of CN¥2.60b and CN¥428.2m worth of receivables due within a year. So it actually has CN¥2.05b more liquid assets than total liabilities.

This surplus suggests that Shanghai Haohai Biological Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face 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 71% 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 32% 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¥2.55b, as well as more liquid assets than liabilities. So we are not troubled with Shanghai Haohai Biological Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shanghai Haohai Biological Technology that you should be aware of.

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.