Is Xilinmen FurnitureLtd (SHSE:603008) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Xilinmen Furniture Co.,Ltd (SHSE:603008) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 Xilinmen FurnitureLtd

What Is Xilinmen FurnitureLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Xilinmen FurnitureLtd had CN¥1.75b of debt in March 2024, down from CN¥2.31b, one year before. But it also has CN¥1.86b in cash to offset that, meaning it has CN¥114.7m net cash.

How Healthy Is Xilinmen FurnitureLtd's Balance Sheet?

The latest balance sheet data shows that Xilinmen FurnitureLtd had liabilities of CN¥4.10b due within a year, and liabilities of CN¥572.9m falling due after that. Offsetting this, it had CN¥1.86b in cash and CN¥1.14b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.67b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Xilinmen FurnitureLtd has a market capitalization of CN¥8.08b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Xilinmen FurnitureLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Xilinmen FurnitureLtd has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Xilinmen FurnitureLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xilinmen FurnitureLtd 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. In the last three years, Xilinmen FurnitureLtd's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Xilinmen FurnitureLtd does have more liabilities than liquid assets, it also has net cash of CN¥114.7m. And it impressed us with its EBIT growth of 61% over the last year. So is Xilinmen FurnitureLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Xilinmen FurnitureLtd is showing 1 warning sign in our investment analysis , you should know about...

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.