Is Kidswant Children ProductsLtd (SZSE:301078) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kidswant Children Products Co.,Ltd. (SZSE:301078) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kidswant Children ProductsLtd

What Is Kidswant Children ProductsLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Kidswant Children ProductsLtd had debt of CN¥2.08b, up from CN¥430.8m in one year. But it also has CN¥3.97b in cash to offset that, meaning it has CN¥1.89b net cash.

How Strong Is Kidswant Children ProductsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kidswant Children ProductsLtd had liabilities of CN¥2.91b due within 12 months and liabilities of CN¥3.30b due beyond that. On the other hand, it had cash of CN¥3.97b and CN¥248.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.99b.

Given Kidswant Children ProductsLtd has a market capitalization of CN¥11.8b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Kidswant Children ProductsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Kidswant Children ProductsLtd grew its EBIT by 71% 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 ultimately the future profitability of the business will decide if Kidswant Children ProductsLtd can strengthen its balance sheet over time. 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. Kidswant Children ProductsLtd 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, Kidswant Children ProductsLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Kidswant Children ProductsLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.89b. And it impressed us with free cash flow of CN¥1.0b, being 295% of its EBIT. So we don't think Kidswant Children ProductsLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Kidswant Children ProductsLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.