Is H World Group (NASDAQ:HTHT) Using Too Much Debt?

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. As with many other companies H World Group Limited (NASDAQ:HTHT) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for H World Group

What Is H World Group's Net 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.

A Look At H World Group's Liabilities

The latest balance sheet data shows that H World Group had liabilities of CN¥14.8b due within a year, and liabilities of CN¥33.5b falling due after that. Offsetting this, it had CN¥7.86b in cash and CN¥1.45b in receivables that were due within 12 months. So it has liabilities totalling CN¥39.0b more than its cash and near-term receivables, combined.

This deficit isn't so bad because H World Group is worth a massive CN¥89.5b, 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. Despite its noteworthy liabilities, H World Group boasts net cash, so it's fair to say it does not have a heavy debt load!

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¥3.9b. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last year, H World Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While H World Group does have more liabilities than liquid assets, it also 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. 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.

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.