We Think Center International GroupLtd (SHSE:603098) Can Manage Its Debt With Ease

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.' 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. Importantly, Center International Group Co.,Ltd. (SHSE:603098) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Center International GroupLtd

What Is Center International GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Center International GroupLtd had CN¥961.3m of debt in March 2024, down from CN¥1.40b, one year before. However, its balance sheet shows it holds CN¥1.06b in cash, so it actually has CN¥99.8m net cash.

How Strong Is Center International GroupLtd's Balance Sheet?

According to the last reported balance sheet, Center International GroupLtd had liabilities of CN¥3.05b due within 12 months, and liabilities of CN¥258.0m due beyond 12 months. Offsetting this, it had CN¥1.06b in cash and CN¥3.69b in receivables that were due within 12 months. So it actually has CN¥1.44b more liquid assets than total liabilities.

This surplus suggests that Center International GroupLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Center International GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also relevant is that Center International GroupLtd has grown its EBIT by a very respectable 23% in the last year, thus enhancing its ability to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Center International GroupLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Happily for any shareholders, Center International GroupLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Center International GroupLtd has CN¥99.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥268m, being 156% of its EBIT. So we don't think Center International GroupLtd's use of debt is risky. 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 Center International GroupLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.