Stock Analysis

Is Labixiaoxin Snacks Group (HKG:1262) Weighed On By Its Debt Load?

SEHK:1262
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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 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. We can see that Labixiaoxin Snacks Group Limited (HKG:1262) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Labixiaoxin Snacks Group

How Much Debt Does Labixiaoxin Snacks Group Carry?

The image below, which you can click on for greater detail, shows that Labixiaoxin Snacks Group had debt of CN¥493.9m at the end of June 2023, a reduction from CN¥550.4m over a year. However, it does have CN¥66.8m in cash offsetting this, leading to net debt of about CN¥427.2m.

debt-equity-history-analysis
SEHK:1262 Debt to Equity History November 13th 2023

A Look At Labixiaoxin Snacks Group's Liabilities

We can see from the most recent balance sheet that Labixiaoxin Snacks Group had liabilities of CN¥635.8m falling due within a year, and liabilities of CN¥15.8m due beyond that. Offsetting this, it had CN¥66.8m in cash and CN¥314.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥270.2m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥248.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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.

Over 12 months, Labixiaoxin Snacks Group reported revenue of CN¥748m, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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¥44m 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. For example, we would not want to see a repeat of last year's loss of CN¥75m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Labixiaoxin Snacks Group , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Labixiaoxin Snacks Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.