Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that H World Group Limited (NASDAQ:HTHT) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.
What Is H World Group's Net Debt?
As you can see below, H World Group had CN¥5.27b of debt at March 2025, down from CN¥5.75b a year prior. However, it does have CN¥10.9b in cash offsetting this, leading to net cash of CN¥5.60b.
A Look At H World Group's Liabilities
According to the last reported balance sheet, H World Group had liabilities of CN¥14.9b due within 12 months, and liabilities of CN¥36.1b due beyond 12 months. Offsetting these obligations, it had cash of CN¥10.9b as well as receivables valued at CN¥1.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥38.8b.
This deficit isn't so bad because H World Group is worth CN¥68.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, H World Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
View our latest analysis for H World Group
Fortunately, H World Group grew its EBIT by 4.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if H World Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. H World Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, H World Group 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 H World Group does have more liabilities than liquid assets, it also has net cash of CN¥5.60b. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in CN¥6.4b. So we don't have any problem with H World Group's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for H World Group you should know about.
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.
About NasdaqGS:HTHT
H World Group
Develops leased and owned, manachised, and franchised hotels in the People’s Republic of China.
Very undervalued with adequate balance sheet.
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