China Kepei Education Group (HKG:1890) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies China Kepei Education Group Limited (HKG:1890) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China Kepei Education Group

What Is China Kepei Education Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 China Kepei Education Group had CN¥527.3m of debt, an increase on CN¥100.0m, over one year. But on the other hand it also has CN¥1.45b in cash, leading to a CN¥926.8m net cash position.

How Strong Is China Kepei Education Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Kepei Education Group had liabilities of CN¥965.2m due within 12 months and liabilities of CN¥277.4m due beyond that. On the other hand, it had cash of CN¥1.45b and CN¥192.5m worth of receivables due within a year. So it actually has CN¥403.8m more liquid assets than total liabilities.

This surplus suggests that China Kepei Education Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China Kepei Education Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, China Kepei Education Group grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 China Kepei Education Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Kepei 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, China Kepei Education Group recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case China Kepei Education Group has CN¥926.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So is China Kepei Education Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with China Kepei Education Group .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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