These 4 Measures Indicate That De Rucci Healthy Sleep (SZSE:001323) Is Using Debt Safely

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.' 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 can see that De Rucci Healthy Sleep Co., Ltd. (SZSE:001323) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is De Rucci Healthy Sleep's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 De Rucci Healthy Sleep had CN¥1.21b of debt, an increase on CN¥193.0m, over one year. But it also has CN¥3.73b in cash to offset that, meaning it has CN¥2.52b net cash.

How Strong Is De Rucci Healthy Sleep's Balance Sheet?

We can see from the most recent balance sheet that De Rucci Healthy Sleep had liabilities of CN¥2.87b falling due within a year, and liabilities of CN¥120.6m due beyond that. On the other hand, it had cash of CN¥3.73b and CN¥97.2m worth of receivables due within a year. So it actually has CN¥833.3m more liquid assets than total liabilities.

This short term liquidity is a sign that De Rucci Healthy Sleep could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, De Rucci Healthy Sleep boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for De Rucci Healthy Sleep

And we also note warmly that De Rucci Healthy Sleep grew its EBIT by 16% last year, making its debt load easier to handle. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, De Rucci Healthy Sleep recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that De Rucci Healthy Sleep has net cash of CN¥2.52b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥621m, being 81% of its EBIT. So we don't think De Rucci Healthy Sleep's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for De Rucci Healthy Sleep that you should be aware of before investing here.

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.

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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.