Xi'an Catering (SZSE:000721) Is Making Moderate Use Of 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.' 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. As with many other companies Xi'an Catering Co., Ltd. (SZSE:000721) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Xi'an Catering

How Much Debt Does Xi'an Catering Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Xi'an Catering had CN¥494.1m of debt, an increase on CN¥413.7m, over one year. On the flip side, it has CN¥79.2m in cash leading to net debt of about CN¥414.9m.

A Look At Xi'an Catering's Liabilities

The latest balance sheet data shows that Xi'an Catering had liabilities of CN¥875.6m due within a year, and liabilities of CN¥262.1m falling due after that. Offsetting these obligations, it had cash of CN¥79.2m as well as receivables valued at CN¥73.7m due within 12 months. So it has liabilities totalling CN¥984.7m more than its cash and near-term receivables, combined.

Xi'an Catering has a market capitalization of CN¥3.98b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xi'an Catering's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Xi'an Catering reported revenue of CN¥750m, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Xi'an Catering produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥104m. 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. Another cause for caution is that is bled CN¥18m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Xi'an Catering that you should be aware of before investing here.

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.

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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.