“The biggest investment risk is not price volatility, but whether we suffer a permanent loss of capital,” says Lee Lu, an external fund manager backed by Berkshire Hathaway’s Charlie Munger. .When I think about how risky a company is, I always like to look to the use of debt as too much debt can lead to bankruptcy. Hua Jin International Holdings Limited (HKG:2738) has debt on its balance sheet. But should shareholders worry about the use of debt?
When does debt become a problem
Debt and other liabilities become dangerous to a business when it cannot easily meet these obligations through free cash flow or raising capital at an attractive price. Part of capitalism is the process of ‘creative destruction’ in which failed businesses are ruthlessly liquidated by bankers. Although less common, we often see debt companies permanently diluting their shareholders. But by displacing dilution, debt can be a very good tool for companies that need capital to invest in growth at a high rate of return. The first step is to consider cash and debt together.
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What are Huajin International Holdings’ liabilities?
You can click the image below for more details, which shows that in June 2022, Huajin International Holdings had a debt of CN 1.54 billion. However, there is his 60.3 million CN cash offsetting this, leading to a net debt of around 1.48 billion CN.
How strong is Huajin International Holdings’ balance sheet?
According to its previously reported balance sheet, Huajin International Holdings has debt of CN¥1.94 billion due within 12 months and CN¥406.8 million due beyond 12 months. I had a debt. On the other hand, cash of 60.3 million CN and he had claims within his one year of 260.1 million CN. Therefore, the company’s liabilities exceed its combined cash and (short-term) receivables by RMB 2.03 billion.
This deficit casts a shadow over the 945.4 million CN company, a colossus towering over mere mortals. So definitely we’ll be looking at that balance sheet carefully. After all, Huajin International Holdings is likely to need a major capital boost if it needs to pay its creditors today.The balance sheet is an area to watch when analyzing debt. One thing is clear. However, debt cannot be viewed in complete isolation. Huajin International Holdings will need the proceeds to repay its debts. So if you want to learn more about earnings, it might be worth checking out this graph of long-term earnings trends.
Last year, Huajin International Holdings was not profitable at the EBIT level, but increased revenue by 21% to CNY5 billion. Shareholders probably have their fingers crossed on whether it can grow profitably.
Buyer’s responsibility
Huajin International Holdings has grown its top line very well, but the cold truth is that it is losing money on its EBIT line. In fact, at the EBIT level he lost CN¥21m. Alongside the above responsibilities, we get nervous about the company. For us to care about it, it needs to improve its operations quickly. Especially since last year’s negative free cash flow depleted his 247 million CN yen. Therefore, suffice it to say that we consider stocks to be risky. Clearly, the balance sheet is the starting point when analyzing debt levels. Ultimately, however, all companies may have the risk of existing off balance sheets.For example we discovered Two warning signs for Huajin International Holdings Things to know before investing here.
After all, if you’re interested in a fast-growing company with a solid balance sheet, check out our list of net cash growth stocks right away.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …