Here's Why Nanjing Xinjiekou Department Store (SHSE:600682) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Nanjing Xinjiekou Department Store Co., Ltd. (SHSE:600682) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nanjing Xinjiekou Department Store

How Much Debt Does Nanjing Xinjiekou Department Store Carry?

You can click the graphic below for the historical numbers, but it shows that Nanjing Xinjiekou Department Store had CN¥786.1m of debt in September 2024, down from CN¥895.1m, one year before. But it also has CN¥5.77b in cash to offset that, meaning it has CN¥4.98b net cash.

How Strong Is Nanjing Xinjiekou Department Store's Balance Sheet?

We can see from the most recent balance sheet that Nanjing Xinjiekou Department Store had liabilities of CN¥5.93b falling due within a year, and liabilities of CN¥983.4m due beyond that. On the other hand, it had cash of CN¥5.77b and CN¥1.57b worth of receivables due within a year. So it actually has CN¥428.6m more liquid assets than total liabilities.

This surplus suggests that Nanjing Xinjiekou Department Store has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanjing Xinjiekou Department Store boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Nanjing Xinjiekou Department Store's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nanjing Xinjiekou Department Store can strengthen its balance sheet over time. 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 Nanjing Xinjiekou Department Store 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. Over the last three years, Nanjing Xinjiekou Department Store 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 Nanjing Xinjiekou Department Store has net cash of CN¥4.98b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥512m, being 103% of its EBIT. So is Nanjing Xinjiekou Department Store's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Nanjing Xinjiekou Department Store 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.