Is Lao Feng Xiang (SHSE:600612) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Lao Feng Xiang Co., Ltd. (SHSE:600612) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lao Feng Xiang

What Is Lao Feng Xiang's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Lao Feng Xiang had debt of CN¥7.90b, up from CN¥7.41b in one year. However, it does have CN¥15.2b in cash offsetting this, leading to net cash of CN¥7.34b.

A Look At Lao Feng Xiang's Liabilities

According to the last reported balance sheet, Lao Feng Xiang had liabilities of CN¥11.3b due within 12 months, and liabilities of CN¥379.1m due beyond 12 months. Offsetting this, it had CN¥15.2b in cash and CN¥1.98b in receivables that were due within 12 months. So it actually has CN¥5.53b more liquid assets than total liabilities.

It's good to see that Lao Feng Xiang has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Lao Feng Xiang has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Lao Feng Xiang grew its EBIT by 9.3% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lao Feng Xiang 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. Over the last three years, Lao Feng Xiang actually produced more free cash flow than EBIT. 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 Lao Feng Xiang has CN¥7.34b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.0b, being 108% of its EBIT. So we don't think Lao Feng Xiang's use of debt is risky. Given Lao Feng Xiang has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.