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'. 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. Importantly, Haier Electronics Group Co., Ltd. (HKG:1169) does carry debt. But should shareholders be worried about its use of debt?
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. 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. 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.
Check out our latest analysis for Haier Electronics Group
How Much Debt Does Haier Electronics Group Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Haier Electronics Group had debt of CN¥100.1m, up from CN¥90.1m in one year. But on the other hand it also has CN¥20.1b in cash, leading to a CN¥20.0b net cash position.
A Look At Haier Electronics Group's Liabilities
According to the last reported balance sheet, Haier Electronics Group had liabilities of CN¥17.8b due within 12 months, and liabilities of CN¥3.01b due beyond 12 months. On the other hand, it had cash of CN¥20.1b and CN¥5.41b worth of receivables due within a year. So it can boast CN¥4.69b more liquid assets than total liabilities.
This surplus suggests that Haier Electronics Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Haier Electronics Group boasts net cash, so it's fair to say it does not have a heavy debt load!
While Haier Electronics Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Haier Electronics Group'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 company can only pay off debt with cold hard cash, not accounting profits. While Haier Electronics Group 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. During the last three years, Haier Electronics Group generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.