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.' 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, Minsheng Education Group Company Limited (HKG:1569) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Minsheng Education Group
What Is Minsheng Education Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Minsheng Education Group had CN„1.97b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN„2.30b in cash, so it actually has CN„331.0m net cash.
How Strong Is Minsheng Education Group's Balance Sheet?
We can see from the most recent balance sheet that Minsheng Education Group had liabilities of CN„3.19b falling due within a year, and liabilities of CN„1.57b due beyond that. Offsetting this, it had CN„2.30b in cash and CN„552.6m in receivables that were due within 12 months. So its liabilities total CN„1.90b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CN„723.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Minsheng Education Group would likely require a major re-capitalisation if it had to pay its creditors today. Given that Minsheng Education Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
Importantly, Minsheng Education Group's EBIT fell a jaw-dropping 39% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Minsheng Education Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Minsheng Education Group 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. In the last three years, Minsheng Education Group created free cash flow amounting to 15% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
Although Minsheng Education Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN„331.0m. However, we do find both Minsheng Education Group's level of total liabilities and its EBIT growth rate troubling. So even though it has net cash, we do think the business has some risks worth watching. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Minsheng Education Group you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
About SEHK:1569
Minsheng Education Group
An investment holding company, provides educational services in the People's Republic of China.
Adequate balance sheet and slightly overvalued.