Cabbeen Fashion (HKG:2030) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Cabbeen Fashion Limited (HKG:2030) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, 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.

View our latest analysis for Cabbeen Fashion

How Much Debt Does Cabbeen Fashion Carry?

You can click the graphic below for the historical numbers, but it shows that Cabbeen Fashion had CN¥220.4m of debt in June 2024, down from CN¥303.1m, one year before. But it also has CN¥388.1m in cash to offset that, meaning it has CN¥167.7m net cash.

How Healthy Is Cabbeen Fashion's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cabbeen Fashion had liabilities of CN¥715.9m due within 12 months and liabilities of CN¥8.06m due beyond that. Offsetting these obligations, it had cash of CN¥388.1m as well as receivables valued at CN¥720.0m due within 12 months. So it can boast CN¥384.1m more liquid assets than total liabilities.

This surplus strongly suggests that Cabbeen Fashion has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Cabbeen Fashion has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Cabbeen Fashion made a loss at the EBIT level, last year, it was also good to see that it generated CN¥82m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cabbeen Fashion's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Cabbeen Fashion 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 year, Cabbeen Fashion recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cabbeen Fashion has CN¥167.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥78m, being 95% of its EBIT. So we don't think Cabbeen Fashion's use of debt is risky. 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 example, we've discovered 1 warning sign for Cabbeen Fashion 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.

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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.