Is Xiabuxiabu Catering Management (China) Holdings (HKG:520) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

What Is Xiabuxiabu Catering Management (China) Holdings's Net Debt?

As you can see below, Xiabuxiabu Catering Management (China) Holdings had CN¥30.0m of debt at June 2022, down from CN¥50.7m a year prior. 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

Zooming in on the latest balance sheet data, we can see that Xiabuxiabu Catering Management (China) Holdings had liabilities of CN¥1.68b due within 12 months and liabilities of CN¥1.04b due beyond that. On the other hand, it had cash of CN¥779.0m and CN¥47.1m worth of receivables due within a year. So its liabilities total CN¥1.89b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Xiabuxiabu Catering Management (China) Holdings has a market capitalization of CN¥8.86b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 ultimately the future profitability of the business will decide if Xiabuxiabu Catering Management (China) Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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?

Although Xiabuxiabu Catering Management (China) Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥451m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. We've identified 1 warning sign with Xiabuxiabu Catering Management (China) Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.