Is Xin Point Holdings (HKG:1571) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Xin Point Holdings Limited (HKG:1571) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xin Point Holdings

What Is Xin Point Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Xin Point Holdings had debt of CN¥50.2m, up from CN¥3.15m in one year. However, its balance sheet shows it holds CN¥539.0m in cash, so it actually has CN¥488.8m net cash.

A Look At Xin Point Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Xin Point Holdings had liabilities of CN¥719.0m due within 12 months and liabilities of CN¥64.3m due beyond that. Offsetting these obligations, it had cash of CN¥539.0m as well as receivables valued at CN¥646.0m due within 12 months. So it actually has CN¥401.7m more liquid assets than total liabilities.

This surplus suggests that Xin Point Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xin Point Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Xin Point Holdings has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. 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 Xin Point Holdings 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. Xin Point Holdings 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. In the last three years, Xin Point Holdings created free cash flow amounting to 7.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Xin Point Holdings has net cash of CN¥488.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 65% year-on-year EBIT growth. So we don't think Xin Point Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Xin Point Holdings .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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