We Think Xtep International Holdings (HKG:1368) Can Stay On Top Of Its Debt

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 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 real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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 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 2022 Xtep International Holdings had CN¥2.98b of debt, an increase on CN¥1.95b, over one year. However, its balance sheet shows it holds CN¥3.81b in cash, so it actually has CN¥828.5m net cash.

How Strong Is Xtep International Holdings' Balance Sheet?

The latest balance sheet data shows that Xtep International Holdings had liabilities of CN¥4.92b due within a year, and liabilities of CN¥2.55b falling due after that. Offsetting this, it had CN¥3.81b in cash and CN¥3.67b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Xtep International Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥21.4b 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!

In addition to that, we're happy to report that Xtep International Holdings has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Xtep International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. In the last three years, Xtep International Holdings created free cash flow amounting to 7.5% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xtep International Holdings has CN¥828.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 55% year-on-year EBIT growth. 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. To that end, you should be aware of the 1 warning sign we've spotted with Xtep International Holdings .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.