These 4 Measures Indicate That Bosideng International Holdings (HKG:3998) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Bosideng International Holdings Limited (HKG:3998) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bosideng International Holdings

How Much Debt Does Bosideng International Holdings Carry?

As you can see below, Bosideng International Holdings had CN¥2.28b of debt at March 2021, down from CN¥2.49b a year prior. However, its balance sheet shows it holds CN¥8.40b in cash, so it actually has CN¥6.13b net cash.

A Look At Bosideng International Holdings' Liabilities

The latest balance sheet data shows that Bosideng International Holdings had liabilities of CN¥5.44b due within a year, and liabilities of CN¥2.26b falling due after that. On the other hand, it had cash of CN¥8.40b and CN¥1.24b worth of receivables due within a year. So it can boast CN¥1.94b 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. Succinctly put, Bosideng International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Bosideng International Holdings grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Bosideng International Holdings generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd 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¥6.13b, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥2.7b. So is Bosideng International Holdings's debt a risk? It doesn't seem so to us. 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. For example - Bosideng International Holdings has 2 warning signs 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.
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