The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Renrui Human Resources Technology Holdings Limited (HKG:6919) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Renrui Human Resources Technology Holdings
What Is Renrui Human Resources Technology Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2023 Renrui Human Resources Technology Holdings had CN¥184.5m of debt, an increase on CN¥95.2m, over one year. However, it does have CN¥361.4m in cash offsetting this, leading to net cash of CN¥177.0m.
How Healthy Is Renrui Human Resources Technology Holdings' Balance Sheet?
The latest balance sheet data shows that Renrui Human Resources Technology Holdings had liabilities of CN¥768.2m due within a year, and liabilities of CN¥18.6m falling due after that. Offsetting this, it had CN¥361.4m in cash and CN¥1.35b in receivables that were due within 12 months. So it actually has CN¥926.9m more liquid assets than total liabilities.
This surplus strongly suggests that Renrui Human Resources Technology Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Renrui Human Resources Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Renrui Human Resources Technology Holdings grew its EBIT by 171% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Renrui Human Resources Technology Holdings'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Renrui Human Resources Technology Holdings 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. During the last three years, Renrui Human Resources Technology Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While we empathize with investors who find debt concerning, the bottom line is that Renrui Human Resources Technology Holdings has net cash of CN¥177.0m and plenty of liquid assets. And it impressed us with its EBIT growth of 171% over the last year. So we don't think Renrui Human Resources Technology Holdings's use of debt is risky. 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. We've identified 1 warning sign with Renrui Human Resources Technology Holdings , and understanding them should be part of your investment process.
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.