Visual China GroupLtd (SZSE:000681) Seems To Use Debt Rather Sparingly

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 can see that Visual China Group Co.,Ltd. (SZSE:000681) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Visual China GroupLtd

What Is Visual China GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Visual China GroupLtd had CN¥89.6m of debt, an increase on CN¥79.0m, over one year. However, it does have CN¥388.4m in cash offsetting this, leading to net cash of CN¥298.8m.

How Strong Is Visual China GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Visual China GroupLtd had liabilities of CN¥451.8m falling due within a year, and liabilities of CN¥216.2m due beyond that. On the other hand, it had cash of CN¥388.4m and CN¥250.6m worth of receivables due within a year. So it has liabilities totalling CN¥29.1m more than its cash and near-term receivables, combined.

This state of affairs indicates that Visual China GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.86b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Visual China GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Visual China GroupLtd has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. 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 Visual China GroupLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Visual China GroupLtd 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, Visual China GroupLtd 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

We could understand if investors are concerned about Visual China GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥298.8m. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in CN¥140m. So is Visual China GroupLtd'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. Be aware that Visual China GroupLtd 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.