Is East GroupLtd (SZSE:300376) A Risky Investment?

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 East Group Co.,Ltd (SZSE:300376) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for East GroupLtd

What Is East GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that East GroupLtd had CN¥1.58b of debt in March 2024, down from CN¥2.39b, one year before. However, it does have CN¥2.15b in cash offsetting this, leading to net cash of CN¥573.8m.

How Strong Is East GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that East GroupLtd had liabilities of CN¥3.40b due within 12 months and liabilities of CN¥2.80b due beyond that. Offsetting these obligations, it had cash of CN¥2.15b as well as receivables valued at CN¥3.70b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥347.4m.

Given East GroupLtd has a market capitalization of CN¥11.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, East GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

East GroupLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine East GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While East GroupLtd 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. During the last three years, East GroupLtd generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that East GroupLtd has CN¥573.8m in net cash. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in CN¥145m. So is East 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. To that end, you should be aware of the 1 warning sign we've spotted with East GroupLtd .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.