These 4 Measures Indicate That Ever Harvest Group Holdings (HKG:1549) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ever Harvest Group Holdings Limited (HKG:1549) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ever Harvest Group Holdings

What Is Ever Harvest Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Ever Harvest Group Holdings had HK$70.9m of debt, an increase on HK$42.3m, over one year. However, its balance sheet shows it holds HK$135.8m in cash, so it actually has HK$64.9m net cash.

A Look At Ever Harvest Group Holdings' Liabilities

The latest balance sheet data shows that Ever Harvest Group Holdings had liabilities of HK$198.4m due within a year, and liabilities of HK$563.0k falling due after that. Offsetting these obligations, it had cash of HK$135.8m as well as receivables valued at HK$110.1m due within 12 months. So it can boast HK$47.0m 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.

It was also good to see that despite losing money on the EBIT line last year, Ever Harvest Group Holdings turned things around in the last 12 months, delivering and EBIT of HK$37m. 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 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. 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. In the last year, Ever Harvest Group Holdings's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ever Harvest Group Holdings has HK$64.9m in net cash and a decent-looking balance sheet. 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. For example, we've discovered 3 warning signs for Ever Harvest Group Holdings that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.