We Think 361 Degrees International (HKG:1361) Can Manage Its Debt With Ease

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that 361 Degrees International Limited (HKG:1361) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt 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 December 2022 361 Degrees International had CN¥292.3m of debt, an increase on CN¥207.8m, over one year. However, its balance sheet shows it holds CN¥5.86b in cash, so it actually has CN¥5.57b net cash.

A Look At 361 Degrees International's Liabilities

The latest balance sheet data shows that 361 Degrees International had liabilities of CN¥2.91b due within a year, and liabilities of CN¥112.7m falling due after that. Offsetting these obligations, it had cash of CN¥5.86b as well as receivables valued at CN¥3.11b due within 12 months. So it actually has CN¥5.96b 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. Succinctly put, 361 Degrees International boasts net cash, so it's fair to say it does not have a heavy debt load!

361 Degrees International's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that 361 Degrees International has net cash of CN¥5.57b, as well as more liquid assets than liabilities. So we don't think 361 Degrees International's use of debt is risky. 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.