Does Qian Hu (SGX:BCV) Have A Healthy Balance Sheet?

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.' 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. We can see that Qian Hu Corporation Limited (SGX:BCV) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Qian Hu

What Is Qian Hu's Net Debt?

As you can see below, Qian Hu had S$16.1m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has S$17.1m in cash, leading to a S$1.01m net cash position.

How Healthy Is Qian Hu's Balance Sheet?

We can see from the most recent balance sheet that Qian Hu had liabilities of S$26.5m falling due within a year, and liabilities of S$1.95m due beyond that. Offsetting this, it had S$17.1m in cash and S$13.8m in receivables that were due within 12 months. So it actually has S$2.53m more liquid assets than total liabilities.

This short term liquidity is a sign that Qian Hu could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Qian Hu boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Qian Hu's EBIT was down 47% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Qian Hu 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. While Qian Hu 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, Qian Hu 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 Qian Hu has net cash of S$1.01m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of S$5.1m, being 289% of its EBIT. So we are not troubled with Qian Hu'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 example, we've discovered 2 warning signs for Qian Hu 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. 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.
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