We Think China Sports Industry Group (SHSE:600158) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, China Sports Industry Group Co., Ltd. (SHSE:600158) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does China Sports Industry Group Carry?

As you can see below, China Sports Industry Group had CN¥207.8m of debt at March 2024, down from CN¥311.8m a year prior. However, it does have CN¥1.96b in cash offsetting this, leading to net cash of CN¥1.75b.

A Look At China Sports Industry Group's Liabilities

Zooming in on the latest balance sheet data, we can see that China Sports Industry Group had liabilities of CN¥2.33b due within 12 months and liabilities of CN¥257.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.96b as well as receivables valued at CN¥1.18b due within 12 months. So it can boast CN¥548.8m 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!

Even more impressive was the fact that China Sports Industry Group grew its EBIT by 2,294% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is China Sports Industry 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 91% 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¥1.75b, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in -CN¥317m. So we don't think China Sports Industry Group's use of debt is risky. 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. We've identified 2 warning signs with China Sports Industry Group , and understanding them should be part of your investment process.

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.

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