Would Xi'an Catering (SZSE:000721) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Xi'an Catering Co., Ltd. (SZSE:000721) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Xi'an Catering

What Is Xi'an Catering's Net Debt?

As you can see below, at the end of September 2024, Xi'an Catering had CN¥521.3m of debt, up from CN¥416.3m a year ago. Click the image for more detail. However, it does have CN¥71.0m in cash offsetting this, leading to net debt of about CN¥450.3m.

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

Zooming in on the latest balance sheet data, we can see that Xi'an Catering had liabilities of CN¥878.1m due within 12 months and liabilities of CN¥247.7m due beyond that. On the other hand, it had cash of CN¥71.0m and CN¥75.7m worth of receivables due within a year. So its liabilities total CN¥979.1m more than the combination of its cash and short-term receivables.

Xi'an Catering has a market capitalization of CN¥4.82b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xi'an Catering will need earnings to service that debt. 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 2.2%, to CN¥707m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Xi'an Catering had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥115m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥11m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 example, we've discovered 2 warning signs for Xi'an Catering (1 is potentially serious!) that you should be aware of before investing here.

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.