These 4 Measures Indicate That 361 Degrees International (HKG:1361) Is Using Debt Safely
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 can see that 361 Degrees International Limited (HKG:1361) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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 think about a company's use of debt, we first look at cash and debt together.
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How Much Debt Does 361 Degrees International Carry?
You can click the graphic below for the historical numbers, but it shows that 361 Degrees International had CN¥2.38b of debt in June 2020, down from CN¥2.75b, one year before. However, its balance sheet shows it holds CN¥6.21b in cash, so it actually has CN¥3.83b net cash.
A Look At 361 Degrees International's Liabilities
Zooming in on the latest balance sheet data, we can see that 361 Degrees International had liabilities of CN¥4.65b due within 12 months and liabilities of CN¥101.1m due beyond that. Offsetting these obligations, it had cash of CN¥6.21b as well as receivables valued at CN¥2.58b due within 12 months. So it can boast CN¥4.03b more liquid assets than total liabilities.
This luscious liquidity implies that 361 Degrees International's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, 361 Degrees International boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, 361 Degrees International saw its EBIT drop by 4.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept 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. Looking at the most recent three years, 361 Degrees International recorded free cash flow of 49% 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¥3.83b in net cash and a strong balance sheet. So is 361 Degrees International's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in 361 Degrees International would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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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About SEHK:1361
361 Degrees International
An investment holding company, manufactures and trades in sporting goods in the People’s Republic of China.
Very undervalued with flawless balance sheet.