361 Degrees International (HKG:1361) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies 361 Degrees International Limited (HKG:1361) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is 361 Degrees International's Debt?

You can click the graphic below for the historical numbers, but it shows that 361 Degrees International had CN¥261.2m of debt in December 2024, down from CN¥292.5m, one year before. But on the other hand it also has CN¥4.26b in cash, leading to a CN¥3.99b net cash position.

A Look At 361 Degrees International's Liabilities

The latest balance sheet data shows that 361 Degrees International had liabilities of CN¥3.36b due within a year, and liabilities of CN¥221.7m falling due after that. Offsetting this, it had CN¥4.26b in cash and CN¥4.53b in receivables that were due within 12 months. So it actually has CN¥5.20b more liquid assets than total liabilities.

This surplus liquidity suggests that 361 Degrees International's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that 361 Degrees International has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for 361 Degrees International

And we also note warmly that 361 Degrees International grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if 361 Degrees International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 361 Degrees International 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, 361 Degrees International created free cash flow amounting to 13% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case 361 Degrees International has CN¥3.99b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 16% over the last year. So we don't think 361 Degrees International's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for 361 Degrees International (1 makes us a bit uncomfortable) 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.