Is Ever Harvest Group Holdings (HKG:1549) A Risky Investment?

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 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 Ever Harvest Group Holdings Limited (HKG:1549) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ever Harvest Group Holdings

What Is Ever Harvest Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that Ever Harvest Group Holdings had debt of HK$64.6m at the end of December 2022, a reduction from HK$69.7m over a year. But it also has HK$164.9m in cash to offset that, meaning it has HK$100.3m net cash.

A Look At Ever Harvest Group Holdings' Liabilities

We can see from the most recent balance sheet that Ever Harvest Group Holdings had liabilities of HK$191.7m falling due within a year, and liabilities of HK$1.05m due beyond that. Offsetting these obligations, it had cash of HK$164.9m as well as receivables valued at HK$72.3m due within 12 months. So it actually has HK$44.5m more liquid assets than total liabilities.

It's good to see that Ever Harvest Group Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Ever Harvest Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Ever Harvest Group Holdings grew its EBIT by 194% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ever Harvest Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 three 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$100.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 333% of that EBIT to free cash flow, bringing in HK$47m. The bottom line is that we do not find Ever Harvest Group Holdings's debt levels at all concerning. 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 example - Ever Harvest Group Holdings has 2 warning signs we think 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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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.