Here's Why Xtep International Holdings (HKG:1368) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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 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 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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Xtep International Holdings

What Is Xtep International Holdings's Net Debt?

As you can see below, Xtep International Holdings had CN¥3.03b of debt at June 2024, down from CN¥3.27b a year prior. However, its balance sheet shows it holds CN¥3.86b in cash, so it actually has CN¥833.6m net cash.

A Look At Xtep International Holdings' Liabilities

According to the last reported balance sheet, Xtep International Holdings had liabilities of CN¥6.20b due within 12 months, and liabilities of CN¥1.89b due beyond 12 months. On the other hand, it had cash of CN¥3.86b and CN¥4.84b worth of receivables due within a year. So it actually has CN¥608.9m more liquid assets than total liabilities.

This surplus suggests that Xtep International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Xtep International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Xtep International Holdings grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Xtep International Holdings's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xtep International Holdings has net cash of CN¥833.6m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with Xtep International Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Xtep International Holdings .

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.

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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.