Ever Harvest Group Holdings (HKG:1549) Has A Pretty Healthy Balance Sheet

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. As with many other companies Ever Harvest Group Holdings Limited (HKG:1549) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ever Harvest Group Holdings

What Is Ever Harvest Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Ever Harvest Group Holdings had HK$45.3m of debt, an increase on HK$38.5m, over one year. However, it does have HK$118.5m in cash offsetting this, leading to net cash of HK$73.3m.

How Strong Is Ever Harvest Group Holdings' Balance Sheet?

The latest balance sheet data shows that Ever Harvest Group Holdings had liabilities of HK$203.5m due within a year, and liabilities of HK$1.99m falling due after that. On the other hand, it had cash of HK$118.5m and HK$54.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$32.7m.

Given Ever Harvest Group Holdings has a market capitalization of HK$315.0m, 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, Ever Harvest Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Ever Harvest Group Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$298k in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ever Harvest Group Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ever Harvest Group 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. Happily for any shareholders, Ever Harvest Group Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Ever Harvest Group Holdings does have more liabilities than liquid assets, it also has net cash of HK$73.3m. The cherry on top was that in converted 14,621% of that EBIT to free cash flow, bringing in HK$44m. So we are not troubled with Ever Harvest Group Holdings'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 4 warning signs for Ever Harvest Group Holdings (1 is a bit concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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