Here's Why Xi'an Catering (SZSE:000721) Can Afford Some 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Xi'an Catering Co., Ltd. (SZSE:000721) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Xi'an Catering

What Is Xi'an Catering's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Xi'an Catering had CN¥416.3m of debt, an increase on CN¥319.8m, over one year. However, because it has a cash reserve of CN¥101.2m, its net debt is less, at about CN¥315.1m.

How Healthy Is Xi'an Catering's Balance Sheet?

We can see from the most recent balance sheet that Xi'an Catering had liabilities of CN¥868.3m falling due within a year, and liabilities of CN¥246.5m due beyond that. Offsetting these obligations, it had cash of CN¥101.2m as well as receivables valued at CN¥71.5m due within 12 months. So its liabilities total CN¥942.1m more than the combination of its cash and short-term receivables.

Of course, Xi'an Catering has a market capitalization of CN¥5.28b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xi'an Catering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Xi'an Catering wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to CN¥691m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Xi'an Catering still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥138m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥55m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Xi'an Catering .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.