Here's Why Qian Hu (SGX:BCV) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Qian Hu Corporation Limited (SGX:BCV) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Qian Hu

What Is Qian Hu's Debt?

You can click the graphic below for the historical numbers, but it shows that Qian Hu had S$14.1m of debt in December 2020, down from S$15.2m, one year before. But it also has S$19.6m in cash to offset that, meaning it has S$5.51m net cash.

How Healthy Is Qian Hu's Balance Sheet?

The latest balance sheet data shows that Qian Hu had liabilities of S$26.7m due within a year, and liabilities of S$1.34m falling due after that. Offsetting this, it had S$19.6m in cash and S$14.1m in receivables that were due within 12 months. So it actually has S$5.68m more liquid assets than total liabilities.

It's good to see that Qian Hu has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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 32% 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 Qian Hu'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, 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 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 Qian Hu has net cash of S$5.51m, as well as more liquid assets than liabilities. The cherry on top was that in converted 341% of that EBIT to free cash flow, bringing in S$8.7m. So we are not troubled with Qian Hu's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Qian Hu (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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. 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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