Does Lao Feng Xiang (SHSE:600612) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lao Feng Xiang Co., Ltd. (SHSE:600612) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Lao Feng Xiang

What Is Lao Feng Xiang's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Lao Feng Xiang had debt of CN¥11.4b, up from CN¥10.2b in one year. But it also has CN¥17.4b in cash to offset that, meaning it has CN¥6.02b net cash.

How Healthy Is Lao Feng Xiang's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lao Feng Xiang had liabilities of CN¥17.9b due within 12 months and liabilities of CN¥400.4m due beyond that. Offsetting this, it had CN¥17.4b in cash and CN¥1.55b in receivables that were due within 12 months. So it can boast CN¥669.5m more liquid assets than total liabilities.

This surplus suggests that Lao Feng Xiang has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Lao Feng Xiang boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Lao Feng Xiang grew its EBIT at 13% over the last year, further increasing its ability to manage 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 Lao Feng Xiang'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. Lao Feng Xiang 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, Lao Feng Xiang recorded free cash flow worth a fulsome 100% 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 it is always sensible to investigate a company's debt, in this case Lao Feng Xiang has CN¥6.02b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in CN¥4.4b. So is Lao Feng Xiang's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Lao Feng Xiang's dividend history, without delay!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com