Is Toread Holdings Group (SZSE:300005) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Toread Holdings Group Co., Ltd. (SZSE:300005) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Toread Holdings Group

What Is Toread Holdings Group's Net Debt?

As you can see below, at the end of June 2024, Toread Holdings Group had CN¥155.0m of debt, up from CN¥563.2k a year ago. Click the image for more detail. But on the other hand it also has CN¥1.09b in cash, leading to a CN¥931.1m net cash position.

A Look At Toread Holdings Group's Liabilities

The latest balance sheet data shows that Toread Holdings Group had liabilities of CN¥353.2m due within a year, and liabilities of CN¥169.6m falling due after that. On the other hand, it had cash of CN¥1.09b and CN¥267.8m worth of receivables due within a year. So it can boast CN¥831.1m more liquid assets than total liabilities.

It's good to see that Toread Holdings Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Toread Holdings Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Toread Holdings Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥88m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Toread Holdings Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Toread Holdings 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, Toread Holdings Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Toread Holdings Group has CN¥931.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 303% of that EBIT to free cash flow, bringing in CN¥268m. So is Toread Holdings Group's debt a risk? It doesn't seem so to us. 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 Toread Holdings Group 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.