Does Bosideng International Holdings (HKG:3998) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Bosideng International Holdings Limited (HKG:3998) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Bosideng International Holdings

What Is Bosideng International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Bosideng International Holdings had CN¥2.53b of debt, an increase on CN¥2.28b, over one year. But it also has CN¥9.70b in cash to offset that, meaning it has CN¥7.17b net cash.

How Healthy Is Bosideng International Holdings' Balance Sheet?

According to the last reported balance sheet, Bosideng International Holdings had liabilities of CN¥6.61b due within 12 months, and liabilities of CN¥2.45b due beyond 12 months. On the other hand, it had cash of CN¥9.70b and CN¥1.70b worth of receivables due within a year. So it actually has CN¥2.34b more liquid assets than total liabilities.

This surplus suggests that Bosideng International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Also good is that Bosideng International Holdings grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bosideng International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Bosideng International Holdings 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 three years, Bosideng International Holdings recorded free cash flow worth a fulsome 81% 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 we empathize with investors who find debt concerning, you should keep in mind that Bosideng International Holdings has net cash of CN¥7.17b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 81% 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. However, not all investment risk resides within the balance sheet - far from it. For example - Bosideng International Holdings has 1 warning sign we think you should be aware of.

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.