We Think Minsheng Education Group (HKG:1569) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Minsheng Education Group Company Limited (HKG:1569) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 image below, which you can click on for greater detail, shows that at June 2020 Minsheng Education Group had debt of CN¥711.6m, up from CN¥378.1m in one year. But it also has CN¥1.31b in cash to offset that, meaning it has CN¥603.4m net cash.

A Look At Minsheng Education Group's Liabilities

We can see from the most recent balance sheet that Minsheng Education Group had liabilities of CN¥1.44b falling due within a year, and liabilities of CN¥1.65b due beyond that. On the other hand, it had cash of CN¥1.31b and CN¥12.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.76b.

This deficit isn't so bad because Minsheng Education Group is worth CN¥3.81b, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Minsheng Education Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Minsheng Education Group grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Minsheng Education Group recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down 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¥603.4m. And it also grew its EBIT by 14% 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. Be aware that Minsheng Education Group is showing 2 warning signs in our investment analysis , 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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