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

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.' 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 is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kidswant Children ProductsLtd

How Much Debt Does Kidswant Children ProductsLtd Carry?

As you can see below, at the end of September 2024, Kidswant Children ProductsLtd had CN¥2.57b of debt, up from CN¥1.97b a year ago. Click the image for more detail. But it also has CN¥3.54b in cash to offset that, meaning it has CN¥971.6m net cash.

A Look At Kidswant Children ProductsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Kidswant Children ProductsLtd had liabilities of CN¥2.93b due within 12 months and liabilities of CN¥3.18b due beyond that. Offsetting this, it had CN¥3.54b in cash and CN¥230.2m in receivables that were due within 12 months. So its liabilities total CN¥2.35b more than the combination of its cash and short-term receivables.

Given Kidswant Children ProductsLtd has a market capitalization of CN¥16.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Kidswant Children ProductsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Kidswant Children ProductsLtd grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kidswant Children ProductsLtd'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 company can only pay off debt with cold hard cash, not accounting profits. While Kidswant Children ProductsLtd 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. Over the last three years, Kidswant Children ProductsLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Kidswant Children ProductsLtd does have more liabilities than liquid assets, it also has net cash of CN¥971.6m. The cherry on top was that in converted 241% of that EBIT to free cash flow, bringing in CN¥667m. So is Kidswant Children ProductsLtd'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 instance, we've identified 2 warning signs for Kidswant Children ProductsLtd that 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.

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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.