Here's Why Suofeiya Home Collection (SZSE:002572) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Suofeiya Home Collection Co., Ltd. (SZSE:002572) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Suofeiya Home Collection

How Much Debt Does Suofeiya Home Collection Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Suofeiya Home Collection had CN¥2.94b of debt, an increase on CN¥2.60b, over one year. But on the other hand it also has CN¥2.99b in cash, leading to a CN¥52.8m net cash position.

How Healthy Is Suofeiya Home Collection's Balance Sheet?

The latest balance sheet data shows that Suofeiya Home Collection had liabilities of CN¥4.92b due within a year, and liabilities of CN¥1.06b falling due after that. Offsetting these obligations, it had cash of CN¥2.99b as well as receivables valued at CN¥1.38b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.61b.

Of course, Suofeiya Home Collection has a market capitalization of CN¥12.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Suofeiya Home Collection also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Suofeiya Home Collection grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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 Suofeiya Home Collection'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, a company can only pay off debt with cold hard cash, not accounting profits. While Suofeiya Home Collection has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Suofeiya Home Collection's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Suofeiya Home Collection does have more liabilities than liquid assets, it also has net cash of CN¥52.8m. And it impressed us with its EBIT growth of 28% over the last year. So is Suofeiya Home Collection'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. For example - Suofeiya Home Collection has 2 warning signs we think you should be aware of.

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.