Here's Why China Chuanglian Education Financial Group (HKG:2371) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. Importantly, China Chuanglian Education Financial Group Limited (HKG:2371) does carry debt. But should shareholders be worried about its use of debt?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Chuanglian Education Financial Group

What Is China Chuanglian Education Financial Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 China Chuanglian Education Financial Group had debt of CN¥30.8m, up from CN¥3.06m in one year. But it also has CN¥219.9m in cash to offset that, meaning it has CN¥189.1m net cash.

How Strong Is China Chuanglian Education Financial Group's Balance Sheet?

According to the last reported balance sheet, China Chuanglian Education Financial Group had liabilities of CN¥81.0m due within 12 months, and liabilities of CN¥130.9m due beyond 12 months. On the other hand, it had cash of CN¥219.9m and CN¥31.6m worth of receivables due within a year. So it can boast CN¥39.6m more liquid assets than total liabilities.

This short term liquidity is a sign that China Chuanglian Education Financial Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Chuanglian Education Financial Group has more cash than debt is arguably a good indication that it can manage its debt safely.

We saw China Chuanglian Education Financial Group grow its EBIT by 9.0% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Chuanglian Education Financial Group's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Chuanglian Education Financial 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. During the last two years, China Chuanglian Education Financial Group produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that China Chuanglian Education Financial Group has net cash of CN¥189.1m, as well as more liquid assets than liabilities. So we don't think China Chuanglian Education Financial Group's use of debt is risky. 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. Be aware that China Chuanglian Education Financial Group is showing 3 warning signs in our investment analysis , you should know about...

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. 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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