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Haining China Leather MarketLtd (SZSE:002344) Has A Pretty Healthy Balance Sheet

Simply Wall St ·  May 25, 2023 21:28

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Haining China Leather Market Co.,Ltd (SZSE:002344) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Haining China Leather MarketLtd

How Much Debt Does Haining China Leather MarketLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Haining China Leather MarketLtd had CN¥2.06b of debt, an increase on CN¥1.01b, over one year. However, its balance sheet shows it holds CN¥3.04b in cash, so it actually has CN¥979.6m net cash.

debt-equity-history-analysis
SZSE:002344 Debt to Equity History May 26th 2023

How Healthy Is Haining China Leather MarketLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Haining China Leather MarketLtd had liabilities of CN¥4.35b due within 12 months and liabilities of CN¥1.64b due beyond that. On the other hand, it had cash of CN¥3.04b and CN¥783.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.17b.

Haining China Leather MarketLtd has a market capitalization of CN¥6.37b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Haining China Leather MarketLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Haining China Leather MarketLtd saw its EBIT decline by 8.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Haining China Leather MarketLtd 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, a company can only pay off debt with cold hard cash, not accounting profits. Haining China Leather MarketLtd 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 most recent three years, Haining China Leather MarketLtd recorded free cash flow worth 72% 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 Haining China Leather MarketLtd does have more liabilities than liquid assets, it also has net cash of CN¥979.6m. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in CN¥182m. So we don't have any problem with Haining China Leather MarketLtd's use of debt. 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 Haining China Leather MarketLtd , and understanding them should be part of your investment process.

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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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