We Think Xilinmen FurnitureLtd (SHSE:603008) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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 Xilinmen Furniture Co.,Ltd (SHSE:603008) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Xilinmen FurnitureLtd

What Is Xilinmen FurnitureLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Xilinmen FurnitureLtd had debt of CN¥1.75b at the end of March 2024, a reduction from CN¥2.31b over a year. 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?

We can see from the most recent balance sheet that Xilinmen FurnitureLtd had liabilities of CN¥4.10b falling due within a year, and liabilities of CN¥572.9m due beyond 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.

This deficit isn't so bad because Xilinmen FurnitureLtd is worth CN¥5.13b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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

Although Xilinmen FurnitureLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥114.7m. And it impressed us with its EBIT growth of 61% over the last year. So we are not troubled with Xilinmen FurnitureLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Xilinmen FurnitureLtd that you should be aware of.

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.