Is Xiamen Comfort Science&Technology Group (SZSE:002614) Using Too Much Debt?

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 Xiamen Comfort Science&Technology Group Co., Ltd (SZSE:002614) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Xiamen Comfort Science&Technology Group

What Is Xiamen Comfort Science&Technology Group's Debt?

As you can see below, Xiamen Comfort Science&Technology Group had CN¥1.24b of debt at June 2024, down from CN¥1.38b a year prior. However, it does have CN¥2.14b in cash offsetting this, leading to net cash of CN¥901.7m.

How Strong Is Xiamen Comfort Science&Technology Group's Balance Sheet?

According to the last reported balance sheet, Xiamen Comfort Science&Technology Group had liabilities of CN¥2.30b due within 12 months, and liabilities of CN¥648.2m due beyond 12 months. Offsetting this, it had CN¥2.14b in cash and CN¥852.6m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Xiamen Comfort Science&Technology Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.08b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Xiamen Comfort Science&Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Xiamen Comfort Science&Technology Group's load is not too heavy, because its EBIT was down 25% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Xiamen Comfort Science&Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xiamen Comfort Science&Technology Group 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. Happily for any shareholders, Xiamen Comfort Science&Technology Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xiamen Comfort Science&Technology Group has CN¥901.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 227% of that EBIT to free cash flow, bringing in CN¥267m. So we are not troubled with Xiamen Comfort Science&Technology Group'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 example - Xiamen Comfort Science&Technology Group has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.