These 4 Measures Indicate That China Chunlai Education Group (HKG:1969) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. As with many other companies China Chunlai Education Group Co., Ltd. (HKG:1969) makes use of debt. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China Chunlai Education Group's Net Debt?

As you can see below, China Chunlai Education Group had CN¥1.67b of debt at February 2025, down from CN¥1.88b a year prior. On the flip side, it has CN¥435.3m in cash leading to net debt of about CN¥1.23b.

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

We can see from the most recent balance sheet that China Chunlai Education Group had liabilities of CN¥2.34b falling due within a year, and liabilities of CN¥608.1m due beyond that. Offsetting this, it had CN¥435.3m in cash and CN¥1.39b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.12b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since China Chunlai Education Group has a market capitalization of CN¥5.54b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

View our latest analysis for China Chunlai Education Group

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

China Chunlai Education Group has a low net debt to EBITDA ratio of only 1.1. And its EBIT covers its interest expense a whopping 17.8 times over. So we're pretty relaxed about its super-conservative use of debt. The good news is that China Chunlai Education Group has increased its EBIT by 6.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is China Chunlai Education Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, China Chunlai Education Group recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, China Chunlai Education Group's impressive interest cover implies it has the upper hand on its debt. And its net debt to EBITDA is good too. Looking at all the aforementioned factors together, it strikes us that China Chunlai Education Group can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. Over time, share prices tend to follow earnings per share, so if you're interested in China Chunlai Education Group, you may well want to click here to check an interactive graph of its earnings per share history.

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