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.' 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 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

As you can see below, at the end of September 2021, Bosideng International Holdings had CN¥2.62b of debt, up from CN¥2.26b a year ago. Click the image for more detail. But on the other hand it also has CN¥6.51b in cash, leading to a CN¥3.89b net cash position.

How Healthy Is Bosideng International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bosideng International Holdings had liabilities of CN¥8.23b due within 12 months and liabilities of CN¥2.20b due beyond that. On the other hand, it had cash of CN¥6.51b and CN¥4.10b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Bosideng International Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥32.2b 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!

In addition to that, we're happy to report that Bosideng International Holdings has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Bosideng International Holdings generated free cash flow amounting to a very robust 85% 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¥3.89b, as well as more liquid assets than liabilities. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥2.2b. So we don't think Bosideng International Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Bosideng International Holdings that you should be aware of before investing here.

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.