Chahua Modern Housewares (SHSE:603615) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Chahua Modern Housewares Co., Ltd. (SHSE:603615) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Chahua Modern Housewares

What Is Chahua Modern Housewares's Net Debt?

As you can see below, at the end of September 2024, Chahua Modern Housewares had CN¥170.0m of debt, up from CN¥140.0m a year ago. Click the image for more detail. But it also has CN¥669.7m in cash to offset that, meaning it has CN¥499.7m net cash.

How Strong Is Chahua Modern Housewares' Balance Sheet?

We can see from the most recent balance sheet that Chahua Modern Housewares had liabilities of CN¥261.9m falling due within a year, and liabilities of CN¥26.0m due beyond that. Offsetting these obligations, it had cash of CN¥669.7m as well as receivables valued at CN¥90.3m due within 12 months. So it can boast CN¥472.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Chahua Modern Housewares could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Chahua Modern Housewares boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chahua Modern Housewares's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Chahua Modern Housewares made a loss at the EBIT level, and saw its revenue drop to CN¥582m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Chahua Modern Housewares?

Although Chahua Modern Housewares had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥94m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Chahua Modern Housewares has 1 warning sign we think you should be aware of.

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.

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

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.