Here's Why Minsheng Education Group (HKG:1569) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Minsheng Education Group Company Limited (HKG:1569) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Minsheng Education Group

What Is Minsheng Education Group's Debt?

As you can see below, at the end of December 2020, Minsheng Education Group had CN¥1.83b of debt, up from CN¥523.0m a year ago. Click the image for more detail. However, it does have CN¥2.63b in cash offsetting this, leading to net cash of CN¥803.4m.

How Healthy Is Minsheng Education Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Minsheng Education Group had liabilities of CN¥2.02b due within 12 months and liabilities of CN¥2.92b due beyond that. Offsetting this, it had CN¥2.63b in cash and CN¥61.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.26b.

Minsheng Education Group has a market capitalization of CN¥4.72b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Minsheng Education Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Minsheng Education Group grew its EBIT by 7.8% in the last year, making that debt load look even more manageable. 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 Minsheng Education Group 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 company can only pay off debt with cold hard cash, not accounting profits. While Minsheng Education Group 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. In the last three years, Minsheng Education Group's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Minsheng Education Group does have more liabilities than liquid assets, it also has net cash of CN¥803.4m. And it also grew its EBIT by 7.8% over the last year. So we are not troubled with Minsheng Education Group's debt use. 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 - Minsheng Education Group has 5 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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