These 4 Measures Indicate That Cabbeen Fashion (HKG:2030) Is Using Debt Safely

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. Importantly, Cabbeen Fashion Limited (HKG:2030) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cabbeen Fashion

What Is Cabbeen Fashion's Net Debt?

As you can see below, Cabbeen Fashion had CN¥352.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥822.4m in cash, leading to a CN¥470.3m net cash position.

How Healthy Is Cabbeen Fashion's Balance Sheet?

The latest balance sheet data shows that Cabbeen Fashion had liabilities of CN¥797.8m due within a year, and liabilities of CN¥265.3m falling due after that. Offsetting this, it had CN¥822.4m in cash and CN¥563.1m in receivables that were due within 12 months. So it actually has CN¥322.5m more liquid assets than total liabilities.

It's good to see that Cabbeen Fashion has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Cabbeen Fashion has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Cabbeen Fashion grew its EBIT by 19% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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 most recent three years, Cabbeen Fashion recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Cabbeen Fashion has net cash of CN¥470.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 19% over the last year. So is Cabbeen Fashion'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. However, not all investment risk resides within the balance sheet - far from it. For example Cabbeen Fashion has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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