Does Chaozhou Three-Circle (Group)Ltd (SZSE:300408) Have A Healthy Balance Sheet?

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 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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Chaozhou Three-Circle (Group)Ltd

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

As you can see below, at the end of March 2024, Chaozhou Three-Circle (Group)Ltd had CN¥878.6m of debt, up from CN¥103.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥6.85b in cash, leading to a CN¥5.97b net cash position.

A Look At Chaozhou Three-Circle (Group)Ltd's Liabilities

We can see from the most recent balance sheet that Chaozhou Three-Circle (Group)Ltd had liabilities of CN¥2.36b falling due within a year, and liabilities of CN¥1.27b due beyond that. Offsetting this, it had CN¥6.85b in cash and CN¥2.34b in receivables that were due within 12 months. So it can boast CN¥5.55b more liquid assets than total liabilities.

This short term liquidity is a sign that Chaozhou Three-Circle (Group)Ltd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Chaozhou Three-Circle (Group)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Chaozhou Three-Circle (Group)Ltd has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. While Chaozhou Three-Circle (Group)Ltd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Chaozhou Three-Circle (Group)Ltd recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chaozhou Three-Circle (Group)Ltd has net cash of CN¥5.97b, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. So we don't think Chaozhou Three-Circle (Group)Ltd'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 - Chaozhou Three-Circle (Group)Ltd has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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