We Think Qian Hu (SGX:BCV) Can Manage Its Debt With Ease

Warren Buffett famously said, '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. As with many other companies Qian Hu Corporation Limited (SGX:BCV) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Qian Hu

How Much Debt Does Qian Hu Carry?

As you can see below, Qian Hu had S$12.1m of debt at December 2021, down from S$14.1m a year prior. However, its balance sheet shows it holds S$22.2m in cash, so it actually has S$10.2m net cash.

How Strong Is Qian Hu's Balance Sheet?

We can see from the most recent balance sheet that Qian Hu had liabilities of S$23.7m falling due within a year, and liabilities of S$475.2k due beyond that. Offsetting these obligations, it had cash of S$22.2m as well as receivables valued at S$11.3m due within 12 months. So it actually has S$9.34m more liquid assets than total liabilities.

This excess liquidity is a great indication that Qian Hu's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Qian Hu has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Qian Hu made a loss at the EBIT level, last year, it was also good to see that it generated S$2.5m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 year. 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$10.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 281% of that EBIT to free cash flow, bringing in S$7.0m. So is Qian Hu's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Qian Hu (including 1 which makes us a bit uncomfortable) .

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.