These 4 Measures Indicate That Xiabuxiabu Catering Management (China) Holdings (HKG:520) Is Using Debt Extensively

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. 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?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

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

The image below, which you can click on for greater detail, shows that at December 2021 Xiabuxiabu Catering Management (China) Holdings had debt of CN¥75.8m, up from CN¥20.0m in one year. However, it does have CN¥920.5m in cash offsetting this, leading to net cash of CN¥844.7m.

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

According to the last reported balance sheet, Xiabuxiabu Catering Management (China) Holdings had liabilities of CN¥1.77b due within 12 months, and liabilities of CN¥1.17b due beyond 12 months. On the other hand, it had cash of CN¥920.5m and CN¥62.0m worth of receivables due within a year. So it has liabilities totalling CN¥1.96b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥2.90b, so it does suggest shareholders should keep an eye on Xiabuxiabu Catering Management (China) Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Xiabuxiabu Catering Management (China) Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Xiabuxiabu Catering Management (China) Holdings's EBIT was down 72% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xiabuxiabu Catering Management (China) Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Xiabuxiabu Catering Management (China) Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Xiabuxiabu Catering Management (China) Holdings does have more liabilities than liquid assets, it also has net cash of CN¥844.7m. The cherry on top was that in converted 253% of that EBIT to free cash flow, bringing in CN¥608m. So although we see some areas for improvement, we're not too worried about Xiabuxiabu Catering Management (China) Holdings's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Xiabuxiabu Catering Management (China) Holdings that you should be aware of before investing here.

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.