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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. 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.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for H World Group

What Is H World Group's Debt?

The image below, which you can click on for greater detail, shows that H World Group had debt of CN¥5.21b at the end of September 2023, a reduction from CN¥11.2b over a year. However, it does have CN¥7.86b in cash offsetting this, leading to net cash of CN¥2.65b.

How Healthy Is H World Group's Balance Sheet?

We can see from the most recent balance sheet that H World Group had liabilities of CN¥14.8b falling due within a year, and liabilities of CN¥33.5b due beyond that. Offsetting these obligations, it had cash of CN¥7.86b as well as receivables valued at CN¥1.45b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥39.0b.

H World Group has a very large market capitalization of CN¥79.0b, 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.

Although H World Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥3.9b in EBIT over the last twelve months. 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. Over the last year, H World Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although H World Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥2.65b. And it impressed us with free cash flow of CN¥5.5b, being 142% of its EBIT. So we don't have any problem with H World Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that H World Group is showing 1 warning sign in our investment analysis , 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.