Xueda (Xiamen) Education Technology Group (SZSE:000526) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Xueda (Xiamen) Education Technology Group Co., Ltd (SZSE:000526) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Xueda (Xiamen) Education Technology Group had CN¥629.1m of debt, an increase on CN¥377.1m, over one year. But it also has CN¥1.22b in cash to offset that, meaning it has CN¥594.5m 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¥2.37b due within 12 months and liabilities of CN¥695.5m due beyond that. On the other hand, it had cash of CN¥1.22b and CN¥104.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.74b.

While this might seem like a lot, it is not so bad since Xueda (Xiamen) Education Technology Group has a market capitalization of CN¥5.05b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Xueda (Xiamen) Education Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Xueda (Xiamen) Education Technology Group has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Xueda (Xiamen) Education 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Xueda (Xiamen) Education Technology Group actually produced more free cash flow than EBIT over the last two 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 Xueda (Xiamen) Education Technology Group does have more liabilities than liquid assets, it also has net cash of CN¥594.5m. The cherry on top was that in converted 181% of that EBIT to free cash flow, bringing in CN¥499m. So we don't think Xueda (Xiamen) Education Technology Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Xueda (Xiamen) Education Technology Group's earnings per share history for free.

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.