Does 361 Degrees International (HKG:1361) Have A Healthy Balance Sheet?

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. We note that 361 Degrees International Limited (HKG:1361) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for 361 Degrees International

How Much Debt Does 361 Degrees International Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 361 Degrees International had CN¥541.8m of debt, an increase on CN¥207.6m, over one year. However, it does have CN¥5.55b in cash offsetting this, leading to net cash of CN¥5.01b.

How Strong Is 361 Degrees International's Balance Sheet?

According to the last reported balance sheet, 361 Degrees International had liabilities of CN¥3.00b due within 12 months, and liabilities of CN¥310.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.55b as well as receivables valued at CN¥3.95b due within 12 months. So it can boast CN¥6.19b more liquid assets than total liabilities.

This excess liquidity is a great indication that 361 Degrees International's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

And we also note warmly that 361 Degrees International grew its EBIT by 13% last year, making its debt load easier to handle. 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 361 Degrees International'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. 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's free cash flow amounted to 26% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case 361 Degrees International has CN¥5.01b in net cash and a strong balance sheet. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't think 361 Degrees International'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. For example, we've discovered 1 warning sign for 361 Degrees International that you should be aware of before investing here.

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.