- Oops!Something went wrong.Please try again later.
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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hailiang Education Group Inc. (NASDAQ:HLG) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
How Much Debt Does Hailiang Education Group Carry?
As you can see below, Hailiang Education Group had CN¥67.5m of debt at June 2020, down from CN¥99.6m a year prior. But it also has CN¥1.42b in cash to offset that, meaning it has CN¥1.35b net cash.
How Strong Is Hailiang Education Group's Balance Sheet?
The latest balance sheet data shows that Hailiang Education Group had liabilities of CN¥726.4m due within a year, and liabilities of CN¥26.5m falling due after that. Offsetting these obligations, it had cash of CN¥1.42b as well as receivables valued at CN¥84.1m due within 12 months. So it actually has CN¥750.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Hailiang Education Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hailiang Education Group boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Hailiang Education Group grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hailiang Education Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hailiang Education Group 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. Happily for any shareholders, Hailiang Education Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Hailiang Education Group has net cash of CN¥1.35b, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in CN¥319m. So is Hailiang Education Group's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hailiang Education Group .
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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.