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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

The chart below, which you can click on for greater detail, shows that Xiabuxiabu Catering Management (China) Holdings had CN¥365.5m in debt in June 2025; about the same as the year before. But it also has CN¥742.3m in cash to offset that, meaning it has CN¥376.8m net cash.

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

According to the last reported balance sheet, Xiabuxiabu Catering Management (China) Holdings had liabilities of CN¥1.57b due within 12 months, and liabilities of CN¥657.4m due beyond 12 months. On the other hand, it had cash of CN¥742.3m and CN¥301.3m worth of receivables due within a year. So it has liabilities totalling CN¥1.19b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥853.1m, we think shareholders really should watch Xiabuxiabu Catering Management (China) Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Xiabuxiabu Catering Management (China) Holdings 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. 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.

Check out our latest analysis for Xiabuxiabu Catering Management (China) Holdings

Over 12 months, Xiabuxiabu Catering Management (China) Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥4.3b, which is a fall of 21%. To be frank that doesn't bode well.

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¥397m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Xiabuxiabu Catering Management (China) Holdings insider transactions.

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.