We Think Proya CosmeticsLtd (SHSE:603605) Can Manage Its Debt With Ease

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 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. Importantly, Proya Cosmetics Co.,Ltd. (SHSE:603605) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Proya CosmeticsLtd

How Much Debt Does Proya CosmeticsLtd Carry?

As you can see below, Proya CosmeticsLtd had CN¥878.9m of debt at September 2024, down from CN¥949.1m a year prior. However, it does have CN¥3.63b in cash offsetting this, leading to net cash of CN¥2.75b.

How Strong Is Proya CosmeticsLtd's Balance Sheet?

The latest balance sheet data shows that Proya CosmeticsLtd had liabilities of CN¥1.76b due within a year, and liabilities of CN¥804.4m falling due after that. Offsetting these obligations, it had cash of CN¥3.63b as well as receivables valued at CN¥330.1m due within 12 months. So it actually has CN¥1.40b more liquid assets than total liabilities.

This surplus suggests that Proya CosmeticsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Proya CosmeticsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Proya CosmeticsLtd grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Proya CosmeticsLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Proya CosmeticsLtd produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Proya CosmeticsLtd has net cash of CN¥2.75b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥888m, being 70% of its EBIT. So is Proya CosmeticsLtd's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Proya CosmeticsLtd , and understanding them should be part of your investment process.

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.