China Xinhua Education Group (HKG:2779) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that China Xinhua Education Group Limited (HKG:2779) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is China Xinhua Education Group's Net Debt?

As you can see below, at the end of June 2025, China Xinhua Education Group had CN¥589.4m of debt, up from CN¥544.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥616.3m in cash, leading to a CN¥26.9m net cash position.

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

The latest balance sheet data shows that China Xinhua Education Group had liabilities of CN¥213.3m due within a year, and liabilities of CN¥537.8m falling due after that. On the other hand, it had cash of CN¥616.3m and CN¥246.6m worth of receivables due within a year. So it can boast CN¥111.8m more liquid assets than total liabilities.

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

See our latest analysis for China Xinhua Education Group

Fortunately, China Xinhua Education Group grew its EBIT by 9.6% 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 China Xinhua 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Xinhua 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. Happily for any shareholders, China Xinhua Education Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Xinhua Education Group has net cash of CN¥26.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥411m, being 119% of its EBIT. So we don't think China Xinhua Education Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in China Xinhua Education Group, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.