We Think Xiabuxiabu Catering Management (China) Holdings (HKG:520) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 2020 Xiabuxiabu Catering Management (China) Holdings had debt of CN¥20.0m, up from none in one year. However, its balance sheet shows it holds CN¥1.10b in cash, so it actually has CN¥1.08b net cash.

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

The latest balance sheet data shows that Xiabuxiabu Catering Management (China) Holdings had liabilities of CN¥1.98b due within a year, and liabilities of CN¥1.46b falling due after that. On the other hand, it had cash of CN¥1.10b and CN¥92.0m worth of receivables due within a year. So its liabilities total CN¥2.25b more than the combination of its cash and short-term receivables.

Xiabuxiabu Catering Management (China) Holdings has a market capitalization of CN¥8.11b, so it could very likely raise cash to ameliorate 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!

Shareholders should be aware that Xiabuxiabu Catering Management (China) Holdings's EBIT was down 81% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Xiabuxiabu Catering Management (China) Holdings recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

Although Xiabuxiabu Catering Management (China) Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.08b. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥864m. So we don't have any problem with Xiabuxiabu Catering Management (China) Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Xiabuxiabu Catering Management (China) Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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