Cabbeen Fashion (HKG:2030) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Cabbeen Fashion Limited (HKG:2030) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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¥225.6m of debt in December 2024, down from CN¥336.6m, one year before. But it also has CN¥476.0m in cash to offset that, meaning it has CN¥250.4m net cash.

How Healthy Is Cabbeen Fashion's Balance Sheet?

We can see from the most recent balance sheet that Cabbeen Fashion had liabilities of CN¥737.5m falling due within a year, and liabilities of CN¥11.7m due beyond that. Offsetting this, it had CN¥476.0m in cash and CN¥673.2m in receivables that were due within 12 months. So it can boast CN¥400.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Cabbeen Fashion's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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.

Check out our latest analysis for Cabbeen Fashion

The good news is that Cabbeen Fashion has increased its EBIT by 5.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cabbeen Fashion will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Cabbeen Fashion 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. Over the last two years, Cabbeen Fashion actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cabbeen Fashion has net cash of CN¥250.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥146m, being 134% 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. Be aware that Cabbeen Fashion is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.