These 4 Measures Indicate That Qianhe Condiment and Food (SHSE:603027) Is Using Debt Reasonably Well

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.' 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. We note that Qianhe Condiment and Food Co., Ltd. (SHSE:603027) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Qianhe Condiment and Food

How Much Debt Does Qianhe Condiment and Food Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Qianhe Condiment and Food had CN¥151.8m of debt, an increase on none, over one year. But it also has CN¥1.41b in cash to offset that, meaning it has CN¥1.25b net cash.

How Healthy Is Qianhe Condiment and Food's Balance Sheet?

We can see from the most recent balance sheet that Qianhe Condiment and Food had liabilities of CN¥686.2m falling due within a year, and liabilities of CN¥46.0m due beyond that. On the other hand, it had cash of CN¥1.41b and CN¥147.7m worth of receivables due within a year. So it actually has CN¥822.2m 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.

But the bad news is that Qianhe Condiment and Food has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Qianhe Condiment and Food may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Qianhe Condiment and Food's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qianhe Condiment and Food has net cash of CN¥1.25b, as well as more liquid assets than liabilities. So we are not troubled with Qianhe Condiment and Food's debt use. 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 Qianhe Condiment and Food'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.