These 4 Measures Indicate That Xtep International Holdings (HKG:1368) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Xtep International Holdings Limited (HKG:1368) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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 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

How Much Debt Does Xtep International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Xtep International Holdings had CN¥3.27b of debt, an increase on CN¥2.98b, over one year. However, it does have CN¥3.73b in cash offsetting this, leading to net cash of CN¥461.6m.

A Look At Xtep International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Xtep International Holdings had liabilities of CN¥5.83b due within 12 months and liabilities of CN¥1.99b due beyond that. On the other hand, it had cash of CN¥3.73b and CN¥4.19b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Xtep International Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥18.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Xtep International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Xtep International Holdings saw its EBIT decline by 7.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, Xtep International Holdings reported free cash flow worth 13% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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¥461.6m, as well as more liquid assets than liabilities. So we are not troubled with Xtep International Holdings's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Xtep International Holdings insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.