Bosideng International Holdings (HKG:3998) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Bosideng International Holdings Limited (HKG:3998) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Bosideng International Holdings

How Much Debt Does Bosideng International Holdings Carry?

The image below, which you can click on for greater detail, shows that Bosideng International Holdings had debt of CN¥2.62b at the end of September 2023, a reduction from CN¥3.47b over a year. But it also has CN¥7.09b in cash to offset that, meaning it has CN¥4.47b net cash.

A Look At Bosideng International Holdings' Liabilities

The latest balance sheet data shows that Bosideng International Holdings had liabilities of CN¥9.07b due within a year, and liabilities of CN¥2.38b falling due after that. Offsetting this, it had CN¥7.09b in cash and CN¥4.76b in receivables that were due within 12 months. So it actually has CN¥398.1m more liquid assets than total liabilities.

This state of affairs indicates that Bosideng International Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥41.8b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Bosideng International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Bosideng International Holdings grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bosideng International Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bosideng 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. Over the last three years, Bosideng International Holdings recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bosideng International Holdings has CN¥4.47b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.7b, being 89% of its EBIT. So we don't think Bosideng International Holdings's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Bosideng International Holdings you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.