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.' 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. We can see that Shanghai Haohai Biological Technology Co., Ltd. (HKG:6826) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Shanghai Haohai Biological Technology
What Is Shanghai Haohai Biological Technology's Debt?
The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Haohai Biological Technology had debt of CN¥423.7m, up from CN¥353.8m in one year. But it also has CN¥2.69b in cash to offset that, meaning it has CN¥2.27b net cash.
How Healthy Is Shanghai Haohai Biological Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shanghai Haohai Biological Technology had liabilities of CN¥861.5m due within 12 months and liabilities of CN¥350.6m due beyond that. Offsetting this, it had CN¥2.69b in cash and CN¥387.1m in receivables that were due within 12 months. So it actually has CN¥1.87b more liquid assets than total liabilities.
This surplus suggests that Shanghai Haohai Biological Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Haohai Biological Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Shanghai Haohai Biological Technology has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Haohai Biological Technology 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 company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Haohai Biological Technology 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. Over the most recent three years, Shanghai Haohai Biological Technology recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shanghai Haohai Biological Technology has CN¥2.27b in net cash and a decent-looking balance sheet. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think Shanghai Haohai Biological Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shanghai Haohai Biological Technology you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.