We Think East GroupLtd (SZSE:300376) 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. We can see that East Group Co.,Ltd (SZSE:300376) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for East GroupLtd

What Is East GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that East GroupLtd had debt of CN¥1.44b at the end of September 2024, a reduction from CN¥1.83b over a year. But it also has CN¥1.79b in cash to offset that, meaning it has CN¥348.3m net cash.

How Healthy Is East GroupLtd's Balance Sheet?

The latest balance sheet data shows that East GroupLtd had liabilities of CN¥2.42b due within a year, and liabilities of CN¥2.44b falling due after that. Offsetting these obligations, it had cash of CN¥1.79b as well as receivables valued at CN¥3.51b due within 12 months. So it can boast CN¥436.6m more liquid assets than total liabilities.

This short term liquidity is a sign that East GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, East GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for East GroupLtd if management cannot prevent a repeat of the 48% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. East 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. During the last three years, East GroupLtd produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that East GroupLtd has net cash of CN¥348.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -CN¥576m, being 73% of its EBIT. So we don't have any problem with East GroupLtd's use of debt. 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. To that end, you should be aware of the 3 warning signs we've spotted with East GroupLtd .

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.