Chongqing Qin'an M&E (SHSE:603758) Has A Rock Solid Balance Sheet

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.' 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. We note that Chongqing Qin'an M&E PLC. (SHSE:603758) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Chongqing Qin'an M&E

How Much Debt Does Chongqing Qin'an M&E Carry?

As you can see below, at the end of December 2023, Chongqing Qin'an M&E had CN¥12.4m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.15b in cash, so it actually has CN¥1.14b net cash.

How Healthy Is Chongqing Qin'an M&E's Balance Sheet?

The latest balance sheet data shows that Chongqing Qin'an M&E had liabilities of CN¥544.6m due within a year, and liabilities of CN¥24.5m falling due after that. Offsetting these obligations, it had cash of CN¥1.15b as well as receivables valued at CN¥482.4m due within 12 months. So it actually has CN¥1.07b more liquid assets than total liabilities.

This excess liquidity suggests that Chongqing Qin'an M&E is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Chongqing Qin'an M&E boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Chongqing Qin'an M&E grew its EBIT by 159% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chongqing Qin'an M&E'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chongqing Qin'an M&E 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. Over the last three years, Chongqing Qin'an M&E recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chongqing Qin'an M&E has net cash of CN¥1.14b, as well as more liquid assets than liabilities. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in CN¥170m. When it comes to Chongqing Qin'an M&E's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Chongqing Qin'an M&E you should know about.

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. 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.