Is Xiamen Kingdomway Group (SZSE:002626) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Xiamen Kingdomway Group Company (SZSE:002626) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Xiamen Kingdomway Group

How Much Debt Does Xiamen Kingdomway Group Carry?

You can click the graphic below for the historical numbers, but it shows that Xiamen Kingdomway Group had CN¥848.5m of debt in March 2024, down from CN¥946.1m, one year before. But it also has CN¥1.01b in cash to offset that, meaning it has CN¥165.0m net cash.

How Strong Is Xiamen Kingdomway Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xiamen Kingdomway Group had liabilities of CN¥833.9m due within 12 months and liabilities of CN¥714.7m due beyond that. On the other hand, it had cash of CN¥1.01b and CN¥436.0m worth of receivables due within a year. So it has liabilities totalling CN¥99.1m more than its cash and near-term receivables, combined.

This state of affairs indicates that Xiamen Kingdomway Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥9.14b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Xiamen Kingdomway Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Xiamen Kingdomway Group has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Xiamen Kingdomway Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Xiamen Kingdomway Group 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, Xiamen Kingdomway Group generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Xiamen Kingdomway Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥165.0m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in CN¥185m. So we don't have any problem with Xiamen Kingdomway Group's use of debt. 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. For example Xiamen Kingdomway Group has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.