Is Xueda (Xiamen) Education Technology Group (SZSE:000526) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Xueda (Xiamen) Education Technology Group Co., Ltd (SZSE:000526) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Xueda (Xiamen) Education Technology Group

What Is Xueda (Xiamen) Education Technology Group's Net Debt?

As you can see below, Xueda (Xiamen) Education Technology Group had CN¥647.3m of debt at June 2024, down from CN¥1.07b a year prior. However, its balance sheet shows it holds CN¥863.8m in cash, so it actually has CN¥216.5m net cash.

How Healthy Is Xueda (Xiamen) Education Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xueda (Xiamen) Education Technology Group had liabilities of CN¥1.91b due within 12 months and liabilities of CN¥703.0m due beyond that. Offsetting this, it had CN¥863.8m in cash and CN¥155.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.59b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Xueda (Xiamen) Education Technology Group has a market capitalization of CN¥6.81b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Xueda (Xiamen) Education Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Xueda (Xiamen) Education Technology Group grew its EBIT by 83% 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 Xueda (Xiamen) Education Technology 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, a company can only pay off debt with cold hard cash, not accounting profits. While Xueda (Xiamen) Education Technology Group 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 two years, Xueda (Xiamen) Education Technology Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Xueda (Xiamen) Education Technology Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥216.5m. And it impressed us with free cash flow of CN¥475m, being 164% of its EBIT. So is Xueda (Xiamen) Education Technology Group's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Xueda (Xiamen) Education Technology Group that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.