Here's Why H World Group (NASDAQ:HTHT) Can Manage Its Debt Responsibly

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.' 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 note that H World Group Limited (NASDAQ:HTHT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for H World Group

What Is H World Group's Net Debt?

As you can see below, H World Group had CN¥5.83b of debt at June 2023, down from CN¥10.4b a year prior. But on the other hand it also has CN¥8.07b in cash, leading to a CN¥2.24b net cash position.

A Look At H World Group's Liabilities

We can see from the most recent balance sheet that H World Group had liabilities of CN¥15.7b falling due within a year, and liabilities of CN¥34.3b due beyond that. On the other hand, it had cash of CN¥8.07b and CN¥1.19b worth of receivables due within a year. So it has liabilities totalling CN¥40.8b more than its cash and near-term receivables, combined.

H World Group has a very large market capitalization of CN¥92.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

It was also good to see that despite losing money on the EBIT line last year, H World Group turned things around in the last 12 months, delivering and EBIT of CN¥2.5b. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine H World Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 year. 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¥2.24b. The cherry on top was that in converted 191% of that EBIT to free cash flow, bringing in CN¥4.7b. So we don't have any problem with H World Group's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of H World Group's earnings per share history for free.

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. 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.