Does Center International GroupLtd (SHSE:603098) Have A Healthy 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.' 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. We can see that Center International Group Co.,Ltd. (SHSE:603098) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Center International GroupLtd

What Is Center International GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Center International GroupLtd had CN¥755.7m of debt in September 2024, down from CN¥1.16b, one year before. However, its balance sheet shows it holds CN¥1.08b in cash, so it actually has CN¥323.9m net cash.

How Healthy Is Center International GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Center International GroupLtd had liabilities of CN¥3.00b falling due within a year, and liabilities of CN¥40.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.08b as well as receivables valued at CN¥3.52b due within 12 months. So it actually has CN¥1.55b more liquid assets than total liabilities.

This luscious liquidity implies that Center International GroupLtd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Center International GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Center International GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 62% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Center International GroupLtd'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. Center International 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 three years, Center International 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 we empathize with investors who find debt concerning, you should keep in mind that Center International GroupLtd has net cash of CN¥323.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥289m, being 266% of its EBIT. So is Center International GroupLtd's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Center International GroupLtd (of which 1 is a bit unpleasant!) 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.