Chaozhou Three-Circle (Group)Ltd (SZSE:300408) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Chaozhou Three-Circle (Group) Co.,Ltd. (SZSE:300408) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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

What Is Chaozhou Three-Circle (Group)Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chaozhou Three-Circle (Group)Ltd had CN¥397.1m of debt in September 2024, down from CN¥895.8m, one year before. However, its balance sheet shows it holds CN¥6.29b in cash, so it actually has CN¥5.89b net cash.

How Strong Is Chaozhou Three-Circle (Group)Ltd's Balance Sheet?

We can see from the most recent balance sheet that Chaozhou Three-Circle (Group)Ltd had liabilities of CN¥2.40b falling due within a year, and liabilities of CN¥1.32b due beyond that. Offsetting these obligations, it had cash of CN¥6.29b as well as receivables valued at CN¥2.63b due within 12 months. So it actually has CN¥5.20b more liquid assets than total liabilities.

This surplus suggests that Chaozhou Three-Circle (Group)Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chaozhou Three-Circle (Group)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Chaozhou Three-Circle (Group)Ltd grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Chaozhou Three-Circle (Group)Ltd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chaozhou Three-Circle (Group)Ltd 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, Chaozhou Three-Circle (Group)Ltd produced sturdy free cash flow equating to 71% 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 investigate a company's debt, in this case Chaozhou Three-Circle (Group)Ltd has CN¥5.89b in net cash and a decent-looking balance sheet. And we liked the look of last year's 83% year-on-year EBIT growth. So is Chaozhou Three-Circle (Group)Ltd's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Chaozhou Three-Circle (Group)Ltd you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.