Freetech Road Recycling Technology (Holdings) (HKG:6888) Seems To Use Debt Rather Sparingly
HKG:6888) does carry debt. But should shareholders be worried about its use of debt?" data-reactid="28">Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Freetech Road Recycling Technology (Holdings) Limited (HKG:6888) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Freetech Road Recycling Technology (Holdings) " data-reactid="31"> Check out our latest analysis for Freetech Road Recycling Technology (Holdings)
What Is Freetech Road Recycling Technology (Holdings)'s Net Debt?
The image below, which you can click on for greater detail, shows that Freetech Road Recycling Technology (Holdings) had debt of HK$110.9m at the end of December 2019, a reduction from HK$123.0m over a year. But it also has HK$231.9m in cash to offset that, meaning it has HK$121.0m net cash.
SEHK:6888 Historical Debt May 19th 2020
How Healthy Is Freetech Road Recycling Technology (Holdings)'s Balance Sheet?
The latest balance sheet data shows that Freetech Road Recycling Technology (Holdings) had liabilities of HK$468.4m due within a year, and liabilities of HK$28.4m falling due after that. Offsetting these obligations, it had cash of HK$231.9m as well as receivables valued at HK$411.0m due within 12 months. So it can boast HK$146.1m more liquid assets than total liabilities.
This luscious liquidity implies that Freetech Road Recycling Technology (Holdings)'s balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Freetech Road Recycling Technology (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!
this graph of its long term earnings trend." data-reactid="49">Although Freetech Road Recycling Technology (Holdings) made a loss at the EBIT level, last year, it was also good to see that it generated HK$38m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Freetech Road Recycling Technology (Holdings)'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Freetech Road Recycling Technology (Holdings) 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. Happily for any shareholders, Freetech Road Recycling Technology (Holdings) actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
1 warning sign we think you should be aware of." data-reactid="56">While we empathize with investors who find debt concerning, you should keep in mind that Freetech Road Recycling Technology (Holdings) has net cash of HK$121.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 227% of that EBIT to free cash flow, bringing in HK$87m. The bottom line is that we do not find Freetech Road Recycling Technology (Holdings)'s debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Freetech Road Recycling Technology (Holdings) has 1 warning sign we think you should be aware of.
our list of net cash growth stocks without delay." data-reactid="57">If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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. Thank you for reading." data-reactid="58">Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
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. Thank you for reading.
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