Does Xiamen Changelight (SZSE:300102) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Xiamen Changelight Co., Ltd. (SZSE:300102) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Xiamen Changelight

What Is Xiamen Changelight's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Xiamen Changelight had debt of CN¥1.48b, up from CN¥1.33b in one year. However, it does have CN¥1.31b in cash offsetting this, leading to net debt of about CN¥165.4m.

How Healthy Is Xiamen Changelight's Balance Sheet?

According to the last reported balance sheet, Xiamen Changelight had liabilities of CN¥1.58b due within 12 months, and liabilities of CN¥962.7m due beyond 12 months. On the other hand, it had cash of CN¥1.31b and CN¥1.19b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Xiamen Changelight's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.70b company is struggling for cash, we still think it's worth monitoring its balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Xiamen Changelight has a very low debt to EBITDA ratio of 0.38 so it is strange to see weak interest coverage, with last year's EBIT being only 1.6 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. Notably, Xiamen Changelight made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥52m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Xiamen Changelight'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Xiamen Changelight burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

While Xiamen Changelight's interest cover makes us cautious about it, its track record of converting EBIT to free cash flow is no better. But on the brighter side of life, its net debt to EBITDA leaves us feeling more frolicsome. Looking at all the angles mentioned above, it does seem to us that Xiamen Changelight is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Xiamen Changelight has 1 warning sign we think 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.