China Beststudy Education Group (HKG:3978) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Beststudy Education Group (HKG:3978) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for China Beststudy Education Group

How Much Debt Does China Beststudy Education Group Carry?

The image below, which you can click on for greater detail, shows that at June 2021 China Beststudy Education Group had debt of CN¥355.3m, up from CN¥251.5m in one year. But on the other hand it also has CN¥1.48b in cash, leading to a CN¥1.13b net cash position.

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

Zooming in on the latest balance sheet data, we can see that China Beststudy Education Group had liabilities of CN¥1.65b due within 12 months and liabilities of CN¥973.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.48b as well as receivables valued at CN¥50.1m due within 12 months. So its liabilities total CN¥1.09b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥243.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, China Beststudy Education Group would likely require a major re-capitalisation if it had to pay its creditors today. China Beststudy Education Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

If China Beststudy Education Group can keep growing EBIT at last year's rate of 20% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Beststudy Education Group will need earnings to service that debt. 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. China Beststudy 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 Beststudy Education Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although China Beststudy Education Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.13b. The cherry on top was that in converted 325% of that EBIT to free cash flow, bringing in CN¥647m. So we don't have any problem with China Beststudy Education Group's use of debt. 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. For example - China Beststudy Education Group has 5 warning signs we think you should be aware of.

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.