Xiamen Kingdomway Group (SZSE:002626) Could Easily Take On More Debt

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 note that Xiamen Kingdomway Group Company (SZSE:002626) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 as of September 2024 Xiamen Kingdomway Group had CN¥1.08b of debt, an increase on CN¥527.8m, over one year. However, it does have CN¥1.09b in cash offsetting this, leading to net cash of CN¥3.01m.

A Look At Xiamen Kingdomway Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Xiamen Kingdomway Group had liabilities of CN¥1.07b due within 12 months and liabilities of CN¥760.2m due beyond that. Offsetting this, it had CN¥1.09b in cash and CN¥438.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥300.5m.

Of course, Xiamen Kingdomway Group has a market capitalization of CN¥8.83b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Xiamen Kingdomway Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Xiamen Kingdomway Group grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Xiamen Kingdomway Group's ability to maintain a healthy balance sheet going forward. 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. During the last three years, Xiamen Kingdomway Group generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Xiamen Kingdomway Group has CN¥3.01m in net cash. And it impressed us with free cash flow of CN¥140m, being 96% of its EBIT. So we don't think Xiamen Kingdomway Group's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Xiamen Kingdomway Group you should be aware of.

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.