Ever Harvest Group Holdings (HKG:1549) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ever Harvest Group Holdings

What Is Ever Harvest Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Ever Harvest Group Holdings had debt of HK$69.7m, up from HK$45.3m in one year. However, it does have HK$137.8m in cash offsetting this, leading to net cash of HK$68.2m.

How Healthy Is Ever Harvest Group Holdings' Balance Sheet?

According to the last reported balance sheet, Ever Harvest Group Holdings had liabilities of HK$198.0m due within 12 months, and liabilities of HK$1.17m due beyond 12 months. On the other hand, it had cash of HK$137.8m and HK$83.0m worth of receivables due within a year. So it can boast HK$21.6m more liquid assets than total liabilities.

This surplus suggests that Ever Harvest Group Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ever Harvest Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Ever Harvest Group Holdings grew its EBIT by 2,524% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 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 Ever Harvest Group Holdings 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. Happily for any shareholders, Ever Harvest Group Holdings actually produced more free cash flow than EBIT over the last two years. 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 we empathize with investors who find debt concerning, you should keep in mind that Ever Harvest Group Holdings has net cash of HK$68.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 698% of that EBIT to free cash flow, bringing in HK$13m. So is Ever Harvest Group Holdings'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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ever Harvest Group Holdings is showing 4 warning signs in our investment analysis , you should know about...

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.