Is Xiabuxiabu Catering Management (China) Holdings (HKG:520) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Xiabuxiabu Catering Management (China) Holdings

How Much Debt Does Xiabuxiabu Catering Management (China) Holdings Carry?

The image below, which you can click on for greater detail, shows that Xiabuxiabu Catering Management (China) Holdings had debt of CN¥30.0m at the end of June 2022, a reduction from CN¥50.7m over a year. However, its balance sheet shows it holds CN¥779.0m in cash, so it actually has CN¥749.0m net cash.

A Look At Xiabuxiabu Catering Management (China) Holdings' Liabilities

The latest balance sheet data shows that Xiabuxiabu Catering Management (China) Holdings had liabilities of CN¥1.68b due within a year, and liabilities of CN¥1.04b falling due after that. On the other hand, it had cash of CN¥779.0m and CN¥324.3m worth of receivables due within a year. So its liabilities total CN¥1.61b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Xiabuxiabu Catering Management (China) Holdings is worth CN¥3.54b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Xiabuxiabu Catering Management (China) Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xiabuxiabu Catering Management (China) Holdings'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.

In the last year Xiabuxiabu Catering Management (China) Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥5.3b. That makes us nervous, to say the least.

So How Risky Is Xiabuxiabu Catering Management (China) Holdings?

While Xiabuxiabu Catering Management (China) Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥451m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Xiabuxiabu Catering Management (China) Holdings's profit, revenue, and operating cashflow have changed over the last few years.

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.