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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 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?

Why Does Debt Bring Risk?

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. 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. 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 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?

As you can see below, Ever Harvest Group Holdings had HK$65.2m of debt at June 2023, down from HK$70.9m a year prior. But it also has HK$137.8m in cash to offset that, meaning it has HK$72.6m net cash.

A Look At Ever Harvest Group Holdings' Liabilities

According to the last reported balance sheet, Ever Harvest Group Holdings had liabilities of HK$140.4m due within 12 months, and liabilities of HK$1.28m due beyond 12 months. On the other hand, it had cash of HK$137.8m and HK$54.1m worth of receivables due within a year. So it can boast HK$50.2m more liquid assets than total liabilities.

This excess liquidity suggests that Ever Harvest Group Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Ever Harvest Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Ever Harvest Group Holdings's EBIT was down 98% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$72.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 151% of that EBIT to free cash flow, bringing in HK$22m. So we don't have any problem with Ever Harvest Group Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ever Harvest Group Holdings is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.