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 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 note that Henan Shuanghui Investment & Development Co.,Ltd. (SZSE:000895) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Henan Shuanghui Investment & DevelopmentLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Henan Shuanghui Investment & DevelopmentLtd had CN¥7.95b of debt, an increase on CN¥7.18b, over one year. However, it does have CN¥8.05b in cash offsetting this, leading to net cash of CN¥103.1m.
How Healthy Is Henan Shuanghui Investment & DevelopmentLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Henan Shuanghui Investment & DevelopmentLtd had liabilities of CN¥13.9b due within 12 months and liabilities of CN¥1.38b due beyond that. Offsetting this, it had CN¥8.05b in cash and CN¥588.9m in receivables that were due within 12 months. So its liabilities total CN¥6.63b more than the combination of its cash and short-term receivables.
Of course, Henan Shuanghui Investment & DevelopmentLtd has a titanic market capitalization of CN¥82.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Henan Shuanghui Investment & DevelopmentLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the bad news is that Henan Shuanghui Investment & DevelopmentLtd has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Henan Shuanghui Investment & DevelopmentLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Henan Shuanghui Investment & DevelopmentLtd 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, Henan Shuanghui Investment & DevelopmentLtd recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Henan Shuanghui Investment & DevelopmentLtd has CN¥103.1m in net cash. So we are not troubled with Henan Shuanghui Investment & DevelopmentLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Henan Shuanghui Investment & DevelopmentLtd that you should be aware of before investing here.
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.
