Is De Rucci Healthy Sleep (SZSE:001323) 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. Importantly, De Rucci Healthy Sleep Co., Ltd. (SZSE:001323) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 De Rucci Healthy Sleep

What Is De Rucci Healthy Sleep's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 De Rucci Healthy Sleep had CN¥488.5m of debt, an increase on none, over one year. But it also has CN¥3.68b in cash to offset that, meaning it has CN¥3.19b net cash.

A Look At De Rucci Healthy Sleep's Liabilities

We can see from the most recent balance sheet that De Rucci Healthy Sleep had liabilities of CN¥2.37b falling due within a year, and liabilities of CN¥142.2m due beyond that. Offsetting these obligations, it had cash of CN¥3.68b as well as receivables valued at CN¥96.4m due within 12 months. So it can boast CN¥1.26b more liquid assets than total liabilities.

This surplus suggests that De Rucci Healthy Sleep has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, De Rucci Healthy Sleep boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, De Rucci Healthy Sleep grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. 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 De Rucci Healthy Sleep'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. De Rucci Healthy Sleep 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. During the last three years, De Rucci Healthy Sleep generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case De Rucci Healthy Sleep has CN¥3.19b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in CN¥1.1b. So we don't think De Rucci Healthy Sleep's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in De Rucci Healthy Sleep, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.