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

Warren Buffett famously said, '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 note that Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Xiabuxiabu Catering Management (China) Holdings had CN¥207.9m of debt, an increase on CN¥30.0m, over one year. However, it does have CN¥706.1m in cash offsetting this, leading to net cash of CN¥498.3m.

How Healthy Is Xiabuxiabu Catering Management (China) Holdings' Balance Sheet?

We can see from the most recent balance sheet that Xiabuxiabu Catering Management (China) Holdings had liabilities of CN¥1.91b falling due within a year, and liabilities of CN¥979.8m due beyond that. On the other hand, it had cash of CN¥706.1m and CN¥306.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.87b.

This deficit isn't so bad because Xiabuxiabu Catering Management (China) Holdings is worth CN¥3.27b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Xiabuxiabu Catering Management (China) Holdings reported revenue of CN¥5.4b, which is a gain of 3.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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¥515m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Xiabuxiabu Catering Management (China) Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.