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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies H World Group Limited (NASDAQ:HTHT) makes use of debt. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See 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¥5.75b at the end of March 2024, a reduction from CN¥9.40b over a year. However, it does have CN¥7.57b in cash offsetting this, leading to net cash of CN¥1.82b.

A Look At H World Group's Liabilities

According to the last reported balance sheet, H World Group had liabilities of CN¥15.0b due within 12 months, and liabilities of CN¥34.0b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.57b as well as receivables valued at CN¥1.19b due within 12 months. So its liabilities total CN¥40.3b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥64.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

Even more impressive was the fact that H World Group grew its EBIT by 535% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. While H World Group 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, 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¥1.82b. And it impressed us with free cash flow of CN¥5.8b, being 154% of its EBIT. So is H World Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. 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.