These 4 Measures Indicate That China Merchants Property Operation & Service (SZSE:001914) Is Using Debt Safely

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 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, China Merchants Property Operation & Service Co., Ltd. (SZSE:001914) does carry debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for China Merchants Property Operation & Service

What Is China Merchants Property Operation & Service's Net Debt?

The image below, which you can click on for greater detail, shows that China Merchants Property Operation & Service had debt of CN¥1.18b at the end of March 2024, a reduction from CN¥2.72b over a year. However, it does have CN¥2.24b in cash offsetting this, leading to net cash of CN¥1.06b.

How Strong Is China Merchants Property Operation & Service's Balance Sheet?

The latest balance sheet data shows that China Merchants Property Operation & Service had liabilities of CN¥6.08b due within a year, and liabilities of CN¥1.87b falling due after that. Offsetting this, it had CN¥2.24b in cash and CN¥4.60b in receivables that were due within 12 months. So its liabilities total CN¥1.11b more than the combination of its cash and short-term receivables.

Of course, China Merchants Property Operation & Service has a market capitalization of CN¥12.0b, 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. Despite its noteworthy liabilities, China Merchants Property Operation & Service boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that China Merchants Property Operation & Service grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Merchants Property Operation & Service 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. China Merchants Property Operation & Service 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. Happily for any shareholders, China Merchants Property Operation & Service actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about China Merchants Property Operation & Service's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.06b. And it impressed us with free cash flow of CN¥1.5b, being 114% of its EBIT. So is China Merchants Property Operation & Service'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. Be aware that China Merchants Property Operation & Service is showing 1 warning sign in our investment analysis , 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.