Is China Beststudy Education Group (HKG:3978) Using Too Much Debt?

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.' 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. Importantly, China Beststudy Education Group (HKG:3978) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Beststudy Education Group

What Is China Beststudy Education Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 China Beststudy Education Group had CN¥355.3m of debt, an increase on CN¥251.5m, over one year. However, it does have CN¥1.48b in cash offsetting this, leading to net cash of CN¥1.13b.

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

According to the last reported balance sheet, China Beststudy Education Group had liabilities of CN¥1.65b due within 12 months, and liabilities of CN¥973.8m due beyond 12 months. Offsetting this, it had CN¥1.48b in cash and CN¥46.9m in receivables that were due within 12 months. So its liabilities total CN¥1.10b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥373.4m 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. At the end of the day, China Beststudy Education Group would probably need a major re-capitalization if its creditors were to demand repayment. Given that China Beststudy Education Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Pleasingly, China Beststudy Education Group is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 105% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China Beststudy Education Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While China Beststudy Education Group does have more liabilities than liquid assets, it also has net cash of CN¥1.13b. The cherry on top was that in converted 281% of that EBIT to free cash flow, bringing in CN¥372m. So we are not troubled with China Beststudy Education Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for China Beststudy Education Group you should know about.

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.
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