We Think Xtep International Holdings (HKG:1368) 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 Xtep International Holdings Limited (HKG:1368) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Xtep International Holdings

How Much Debt Does Xtep International Holdings Carry?

As you can see below, at the end of December 2021, Xtep International Holdings had CN¥2.54b of debt, up from CN¥2.18b a year ago. Click the image for more detail. However, it does have CN¥3.93b in cash offsetting this, leading to net cash of CN¥1.39b.

A Look At Xtep International Holdings' Liabilities

According to the last reported balance sheet, Xtep International Holdings had liabilities of CN¥4.05b due within 12 months, and liabilities of CN¥2.58b due beyond 12 months. Offsetting this, it had CN¥3.93b in cash and CN¥3.53b in receivables that were due within 12 months. So it actually has CN¥826.0m 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!

On top of that, Xtep International Holdings grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Xtep International Holdings can strengthen its balance sheet over time. 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 Xtep International Holdings 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, Xtep International Holdings recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Xtep International Holdings has CN¥1.39b in net cash and a decent-looking balance sheet. And we liked the look of last year's 60% year-on-year EBIT growth. So is Xtep International Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Xtep International Holdings that you should be aware of.

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.