International Housewares Retail (HKG:1373) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, International Housewares Retail Company Limited (HKG:1373) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for International Housewares Retail

What Is International Housewares Retail's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2020 International Housewares Retail had HK$39.9m of debt, an increase on HK$28.4m, over one year. But it also has HK$603.5m in cash to offset that, meaning it has HK$563.7m net cash.

How Healthy Is International Housewares Retail's Balance Sheet?

According to the last reported balance sheet, International Housewares Retail had liabilities of HK$648.1m due within 12 months, and liabilities of HK$150.1m due beyond 12 months. On the other hand, it had cash of HK$603.5m and HK$6.78m worth of receivables due within a year. So its liabilities total HK$187.8m more than the combination of its cash and short-term receivables.

Given International Housewares Retail has a market capitalization of HK$1.79b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, International Housewares Retail also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that International Housewares Retail grew its EBIT by 119% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is International Housewares Retail's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While International Housewares Retail 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, International Housewares Retail actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although International Housewares Retail's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$563.7m. And it impressed us with free cash flow of HK$614m, being 168% of its EBIT. So is International Housewares Retail's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - International Housewares Retail has 1 warning sign we think you should be aware of.

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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