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 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. Importantly, Qian Hu Corporation Limited (SGX:BCV) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, Qian Hu had S$12.2m of debt at June 2022, down from S$14.1m a year prior. But it also has S$22.0m in cash to offset that, meaning it has S$9.81m net cash.

A Look At Qian Hu's Liabilities

The latest balance sheet data shows that Qian Hu had liabilities of S$23.6m due within a year, and liabilities of S$1.39m falling due after that. Offsetting these obligations, it had cash of S$22.0m as well as receivables valued at S$12.7m due within 12 months. So it actually has S$9.71m more liquid assets than total liabilities.

This luscious liquidity implies that Qian Hu's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Qian Hu boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Qian Hu grew its EBIT by 350% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Qian Hu'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 it is always sensible to investigate a company's debt, in this case Qian Hu has S$9.81m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of S$4.3m, being 513% of its EBIT. At the end of the day we're not concerned about Qian Hu's 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 Qian Hu has 2 warning signs (and 1 which is significant) we think 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.