Edvance International Holdings (HKG:1410) 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.' 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. We note that Edvance International Holdings Limited (HKG:1410) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Edvance International Holdings

How Much Debt Does Edvance International Holdings Carry?

As you can see below, Edvance International Holdings had HK$22.9m of debt at September 2020, down from HK$25.0m a year prior. But it also has HK$89.3m in cash to offset that, meaning it has HK$66.3m net cash.

A Look At Edvance International Holdings' Liabilities

The latest balance sheet data shows that Edvance International Holdings had liabilities of HK$171.0m due within a year, and liabilities of HK$73.1m falling due after that. Offsetting this, it had HK$89.3m in cash and HK$97.2m in receivables that were due within 12 months. So it has liabilities totalling HK$57.7m more than its cash and near-term receivables, combined.

Given Edvance International Holdings has a market capitalization of HK$522.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Edvance International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Edvance International Holdings grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Edvance International Holdings'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 company can only pay off debt with cold hard cash, not accounting profits. Edvance International Holdings 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. Over the most recent three years, Edvance International Holdings recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While Edvance International Holdings does have more liabilities than liquid assets, it also has net cash of HK$66.3m. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in HK$79m. So we don't think Edvance International Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Edvance International Holdings .

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.

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This article by Simply Wall St is general in nature. 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.
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