These 4 Measures Indicate That Sailvan Times (SZSE:301381) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Sailvan Times Co., Ltd. (SZSE:301381) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Sailvan Times

How Much Debt Does Sailvan Times Carry?

As you can see below, at the end of September 2024, Sailvan Times had CN¥713.8m of debt, up from CN¥175.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.41b in cash, so it actually has CN¥692.6m net cash.

How Strong Is Sailvan Times' Balance Sheet?

The latest balance sheet data shows that Sailvan Times had liabilities of CN¥2.12b due within a year, and liabilities of CN¥450.7m falling due after that. Offsetting these obligations, it had cash of CN¥1.41b as well as receivables valued at CN¥401.2m due within 12 months. So it has liabilities totalling CN¥758.8m more than its cash and near-term receivables, combined.

Since publicly traded Sailvan Times shares are worth a total of CN¥9.28b, it seems unlikely that this level of liabilities would be a major threat. 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, Sailvan Times boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sailvan Times grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 Sailvan Times 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. Sailvan Times 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, Sailvan Times produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sailvan Times has CN¥692.6m in net cash. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't think Sailvan Times's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Sailvan Times (1 doesn't sit too well with us!) 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.