Proya CosmeticsLtd (SHSE:603605) Has A Rock Solid 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.' 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 note that Proya Cosmetics Co.,Ltd. (SHSE:603605) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Proya CosmeticsLtd

How Much Debt Does Proya CosmeticsLtd Carry?

The chart below, which you can click on for greater detail, shows that Proya CosmeticsLtd had CN¥953.0m in debt in September 2023; about the same as the year before. But it also has CN¥3.52b in cash to offset that, meaning it has CN¥2.57b net cash.

How Healthy Is Proya CosmeticsLtd's Balance Sheet?

We can see from the most recent balance sheet that Proya CosmeticsLtd had liabilities of CN¥2.10b falling due within a year, and liabilities of CN¥798.4m due beyond that. Offsetting this, it had CN¥3.52b in cash and CN¥213.1m in receivables that were due within 12 months. So it can boast CN¥838.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Proya CosmeticsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Proya CosmeticsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Proya CosmeticsLtd has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Proya CosmeticsLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Proya CosmeticsLtd 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 most recent three years, Proya CosmeticsLtd recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Proya CosmeticsLtd has net cash of CN¥2.57b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 39% over the last year. So is Proya CosmeticsLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Proya CosmeticsLtd .

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.