Does Xtep International Holdings (HKG:1368) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Xtep International Holdings Limited (HKG:1368) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Xtep International Holdings

What Is Xtep International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Xtep International Holdings had CN¥1.95b of debt in June 2021, down from CN¥2.36b, one year before. However, its balance sheet shows it holds CN¥3.76b in cash, so it actually has CN¥1.80b net cash.

A Look At Xtep International Holdings' Liabilities

We can see from the most recent balance sheet that Xtep International Holdings had liabilities of CN¥3.30b falling due within a year, and liabilities of CN¥1.68b due beyond that. On the other hand, it had cash of CN¥3.76b and CN¥2.77b worth of receivables due within a year. So it actually has CN¥1.55b more liquid assets than total liabilities.

This short term liquidity is a sign that Xtep International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xtep International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Xtep International Holdings grew its EBIT by 15% 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 Xtep International Holdings'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. Xtep International Holdings 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, Xtep International Holdings recorded free cash flow of 40% 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 Xtep International Holdings has CN¥1.80b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 15% over the last year. So is Xtep International Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Xtep International Holdings that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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