Qianhe Condiment and Food (SHSE:603027) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Qianhe Condiment and Food Co., Ltd. (SHSE:603027) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Qianhe Condiment and Food

What Is Qianhe Condiment and Food's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Qianhe Condiment and Food had debt of CN¥232.6m, up from CN¥20.0m in one year. But on the other hand it also has CN¥1.46b in cash, leading to a CN¥1.23b net cash position.

A Look At Qianhe Condiment and Food's Liabilities

According to the last reported balance sheet, Qianhe Condiment and Food had liabilities of CN¥773.3m due within 12 months, and liabilities of CN¥46.7m due beyond 12 months. On the other hand, it had cash of CN¥1.46b and CN¥145.4m worth of receivables due within a year. So it actually has CN¥786.6m more liquid assets than total liabilities.

This surplus suggests that Qianhe Condiment and Food has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Qianhe Condiment and Food has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Qianhe Condiment and Food has increased its EBIT by 4.0% over twelve months, which should ease any concerns about debt repayment. 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 Qianhe Condiment and Food's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Qianhe Condiment and Food 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. Looking at the most recent three years, Qianhe Condiment and Food recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qianhe Condiment and Food has CN¥1.23b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 4.0% over the last year. So we don't have any problem with Qianhe Condiment and Food's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Qianhe Condiment and Food has 1 warning sign we think 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.