China 21st Century Education Group (HKG:1598) Seems To Use Debt Rather Sparingly

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 China 21st Century Education Group Limited (HKG:1598) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China 21st Century Education Group

What Is China 21st Century Education Group's Net Debt?

As you can see below, at the end of June 2021, China 21st Century Education Group had CN¥413.1m of debt, up from CN¥140.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥466.5m in cash, so it actually has CN¥53.3m net cash.

A Look At China 21st Century Education Group's Liabilities

We can see from the most recent balance sheet that China 21st Century Education Group had liabilities of CN¥444.9m falling due within a year, and liabilities of CN¥137.7m due beyond that. Offsetting this, it had CN¥466.5m in cash and CN¥23.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥93.0m more than its cash and near-term receivables, combined.

Of course, China 21st Century Education Group has a market capitalization of CN¥519.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, China 21st Century Education Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, China 21st Century Education Group grew its EBIT by 7.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine China 21st Century Education Group's ability to maintain a healthy balance sheet going forward. 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 China 21st Century 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. Over the last three years, China 21st Century Education Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While China 21st Century Education Group does have more liabilities than liquid assets, it also has net cash of CN¥53.3m. And it impressed us with free cash flow of CN¥32m, being 101% of its EBIT. So we don't think China 21st Century Education Group'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. Case in point: We've spotted 4 warning signs for China 21st Century Education Group you should be aware of.

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.

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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