We Think Seres GroupLtd (SHSE:601127) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. As with many other companies Seres Group Co.,Ltd (SHSE:601127) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Seres GroupLtd

How Much Debt Does Seres GroupLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Seres GroupLtd had CN¥1.96b of debt in September 2024, down from CN¥6.87b, one year before. However, its balance sheet shows it holds CN¥53.2b in cash, so it actually has CN¥51.2b net cash.

How Strong Is Seres GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seres GroupLtd had liabilities of CN¥76.2b due within 12 months and liabilities of CN¥5.47b due beyond that. On the other hand, it had cash of CN¥53.2b and CN¥4.80b worth of receivables due within a year. So its liabilities total CN¥23.6b more than the combination of its cash and short-term receivables.

Given Seres GroupLtd has a humongous market capitalization of CN¥197.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Seres GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Seres GroupLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.7b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Seres GroupLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Seres GroupLtd 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 last year, Seres GroupLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Seres GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥51.2b. The cherry on top was that in converted 1,306% of that EBIT to free cash flow, bringing in CN¥22b. So we don't think Seres GroupLtd's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Seres GroupLtd's earnings per share history for free.

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.