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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Smoore International Holdings Limited (HKG:6969) makes use of debt. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
Check out our latest analysis for Smoore International Holdings
What Is Smoore International Holdings's Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Smoore International Holdings had debt of CN¥2.03b, up from CN¥465.3m in one year. But on the other hand it also has CN¥14.5b in cash, leading to a CN¥12.5b net cash position.
A Look At Smoore International Holdings' Liabilities
The latest balance sheet data shows that Smoore International Holdings had liabilities of CN¥4.68b due within a year, and liabilities of CN¥535.7m falling due after that. Offsetting these obligations, it had cash of CN¥14.5b as well as receivables valued at CN¥2.84b due within 12 months. So it actually has CN¥12.2b more liquid assets than total liabilities.
This surplus suggests that Smoore International Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Smoore International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Smoore International Holdings grew its EBIT by 18% last year, making its debt load easier to handle. 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 Smoore International Holdings can strengthen its balance sheet over time. 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. Smoore International 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. Over the last three years, Smoore International Holdings reported free cash flow worth 11% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Smoore International Holdings has CN¥12.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 18% year-on-year EBIT growth. So is Smoore International Holdings's debt a risk? It doesn't seem so to us. 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 Smoore International Holdings's earnings per share history for free.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.