Bosideng International Holdings (HKG:3998) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Bosideng International Holdings Limited (HKG:3998) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt 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 at September 2022 Bosideng International Holdings had debt of CN¥3.47b, up from CN¥2.62b in one year. However, its balance sheet shows it holds CN¥6.73b in cash, so it actually has CN¥3.25b net cash.

A Look At Bosideng International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Bosideng International Holdings had liabilities of CN¥8.74b due within 12 months and liabilities of CN¥2.62b due beyond that. Offsetting this, it had CN¥6.73b in cash and CN¥4.89b in receivables that were due within 12 months. So it can boast CN¥268.6m 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¥41.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Bosideng International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Bosideng International Holdings grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, Bosideng International Holdings generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bosideng International Holdings has net cash of CN¥3.25b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.6b, being 93% of its EBIT. So we don't think Bosideng International Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Bosideng International Holdings you should be aware of.

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.