We Think Nanjing Xinjiekou Department Store (SHSE:600682) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nanjing Xinjiekou Department Store

What Is Nanjing Xinjiekou Department Store's Net Debt?

The image below, which you can click on for greater detail, shows that Nanjing Xinjiekou Department Store had debt of CN¥786.1m at the end of September 2024, a reduction from CN¥895.1m over a year. However, its balance sheet shows it holds CN¥5.77b in cash, so it actually 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. Offsetting these obligations, it had cash of CN¥5.77b as well as receivables valued at CN¥1.57b due within 12 months. So it actually has CN¥428.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Nanjing Xinjiekou Department Store could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Nanjing Xinjiekou Department Store 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. Happily for any shareholders, Nanjing Xinjiekou Department Store actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in CN¥512m. So we don't think Nanjing Xinjiekou Department Store's use of debt is risky. 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. Be aware that Nanjing Xinjiekou Department Store is showing 1 warning sign in our investment analysis , you should know about...

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.