Lao Feng Xiang (SHSE:600612) Has A Pretty 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.' 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, Lao Feng Xiang Co., Ltd. (SHSE:600612) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Lao Feng Xiang had debt of CN¥5.21b at the end of September 2024, a reduction from CN¥8.32b over a year. But it also has CN¥12.7b in cash to offset that, meaning it has CN¥7.53b 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¥9.37b due within 12 months and liabilities of CN¥326.7m due beyond that. Offsetting these obligations, it had cash of CN¥12.7b as well as receivables valued at CN¥3.06b due within 12 months. So it actually has CN¥6.10b more liquid assets than total liabilities.

This surplus suggests that Lao Feng Xiang is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Lao Feng Xiang boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Lao Feng Xiang's load is not too heavy, because its EBIT was down 21% 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 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 we empathize with investors who find debt concerning, you should keep in mind that Lao Feng Xiang has net cash of CN¥7.53b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥6.4b, being 149% 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.