Does XIANGPIAOPIAO FoodLtd (SHSE:603711) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 XIANGPIAOPIAO Food Co.,Ltd (SHSE:603711) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for XIANGPIAOPIAO FoodLtd

What Is XIANGPIAOPIAO FoodLtd's Net Debt?

As you can see below, XIANGPIAOPIAO FoodLtd had CN¥693.5m of debt at March 2024, down from CN¥971.0m a year prior. However, its balance sheet shows it holds CN¥2.44b in cash, so it actually has CN¥1.75b net cash.

How Healthy Is XIANGPIAOPIAO FoodLtd's Balance Sheet?

The latest balance sheet data shows that XIANGPIAOPIAO FoodLtd had liabilities of CN¥1.17b due within a year, and liabilities of CN¥95.0m falling due after that. On the other hand, it had cash of CN¥2.44b and CN¥38.8m worth of receivables due within a year. So it actually has CN¥1.22b more liquid assets than total liabilities.

It's good to see that XIANGPIAOPIAO FoodLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that XIANGPIAOPIAO FoodLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, XIANGPIAOPIAO FoodLtd's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if XIANGPIAOPIAO FoodLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. XIANGPIAOPIAO FoodLtd 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. Over the last three years, XIANGPIAOPIAO FoodLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that XIANGPIAOPIAO FoodLtd has net cash of CN¥1.75b, as well as more liquid assets than liabilities. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in CN¥455m. So we don't think XIANGPIAOPIAO FoodLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that XIANGPIAOPIAO FoodLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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