Is China Sports Industry Group (SHSE:600158) A Risky Investment?

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. We note that China Sports Industry Group Co., Ltd. (SHSE:600158) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China Sports Industry Group

What Is China Sports Industry Group's Debt?

You can click the graphic below for the historical numbers, but it shows that China Sports Industry Group had CN¥178.5m of debt in June 2024, down from CN¥309.4m, one year before. However, it does have CN¥1.80b in cash offsetting this, leading to net cash of CN¥1.62b.

A Look At China Sports Industry Group's Liabilities

The latest balance sheet data shows that China Sports Industry Group had liabilities of CN¥2.04b due within a year, and liabilities of CN¥222.7m falling due after that. On the other hand, it had cash of CN¥1.80b and CN¥1.14b worth of receivables due within a year. So it can boast CN¥669.9m more liquid assets than total liabilities.

This short term liquidity is a sign that China Sports Industry Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Sports Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, China Sports Industry Group grew its EBIT by 1,982% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Sports Industry Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Sports Industry 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, China Sports Industry Group generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Sports Industry Group has net cash of CN¥1.62b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -CN¥552m, being 98% of its EBIT. So is China Sports Industry Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for China Sports Industry Group that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.