Is 361 Degrees International (HKG:1361) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies 361 Degrees International Limited (HKG:1361) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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What Is 361 Degrees International's Debt?

As you can see below, 361 Degrees International had CN¥207.6m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥5.42b in cash to offset that, meaning it has CN¥5.22b net cash.

A Look At 361 Degrees International's Liabilities

We can see from the most recent balance sheet that 361 Degrees International had liabilities of CN¥3.02b falling due within a year, and liabilities of CN¥14.8m due beyond that. Offsetting these obligations, it had cash of CN¥5.42b as well as receivables valued at CN¥3.54b due within 12 months. So it actually has CN¥5.93b more liquid assets than total liabilities.

This surplus strongly suggests that 361 Degrees International has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, 361 Degrees International boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that 361 Degrees International has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While 361 Degrees International 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, 361 Degrees International recorded free cash flow of 37% of its EBIT, which is weaker 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¥5.22b in net cash and a decent-looking balance sheet. And we liked the look of last year's 26% year-on-year EBIT growth. So is 361 Degrees International's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in 361 Degrees International, you may well want to click here to check an interactive graph of its earnings per share history.

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.