Is Labixiaoxin Snacks Group (HKG:1262) Using Too Much Debt?

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. Importantly, Labixiaoxin Snacks Group Limited (HKG:1262) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Labixiaoxin Snacks Group

What Is Labixiaoxin Snacks Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Labixiaoxin Snacks Group had CN¥405.2m of debt in December 2023, down from CN¥512.4m, one year before. However, because it has a cash reserve of CN¥44.3m, its net debt is less, at about CN¥360.9m.

How Strong Is Labixiaoxin Snacks Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Labixiaoxin Snacks Group had liabilities of CN¥572.5m due within 12 months and liabilities of CN¥15.8m due beyond that. Offsetting this, it had CN¥44.3m in cash and CN¥238.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥305.3m.

This deficit casts a shadow over the CN¥179.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Labixiaoxin Snacks Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Labixiaoxin Snacks Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Labixiaoxin Snacks Group wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥764m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Labixiaoxin Snacks Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥65m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥105m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 Labixiaoxin Snacks Group , 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.