We Think Xiamen Kingdomway Group (SZSE:002626) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Xiamen Kingdomway Group Company (SZSE:002626) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Xiamen Kingdomway Group

What Is Xiamen Kingdomway Group's Net Debt?

The image below, which you can click on for greater detail, shows that Xiamen Kingdomway Group had debt of CN¥890.3m at the end of June 2024, a reduction from CN¥1.04b over a year. However, it does have CN¥917.7m in cash offsetting this, leading to net cash of CN¥27.4m.

How Strong Is Xiamen Kingdomway Group's Balance Sheet?

According to the last reported balance sheet, Xiamen Kingdomway Group had liabilities of CN¥947.1m due within 12 months, and liabilities of CN¥688.6m due beyond 12 months. Offsetting this, it had CN¥917.7m in cash and CN¥416.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥301.9m more than its cash and near-term receivables, combined.

Of course, Xiamen Kingdomway Group has a market capitalization of CN¥8.50b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Xiamen Kingdomway Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Xiamen Kingdomway Group grew its EBIT by 8.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Xiamen Kingdomway Group 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. While Xiamen Kingdomway Group 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, Xiamen Kingdomway Group recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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¥27.4m. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥93m. So we don't think Xiamen Kingdomway Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Xiamen Kingdomway Group you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.