Does Qinqin Foodstuffs Group (Cayman) (HKG:1583) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Qinqin Foodstuffs Group (Cayman) Company Limited (HKG:1583) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Qinqin Foodstuffs Group (Cayman)'s Net Debt?

The image below, which you can click on for greater detail, shows that Qinqin Foodstuffs Group (Cayman) had debt of CN¥172.5m at the end of December 2024, a reduction from CN¥292.3m over a year. But it also has CN¥589.7m in cash to offset that, meaning it has CN¥417.2m net cash.

How Healthy Is Qinqin Foodstuffs Group (Cayman)'s Balance Sheet?

According to the last reported balance sheet, Qinqin Foodstuffs Group (Cayman) had liabilities of CN¥571.4m due within 12 months, and liabilities of CN¥152.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥589.7m as well as receivables valued at CN¥20.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥114.4m.

Given Qinqin Foodstuffs Group (Cayman) has a market capitalization of CN¥876.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Qinqin Foodstuffs Group (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Qinqin Foodstuffs Group (Cayman)

On top of that, Qinqin Foodstuffs Group (Cayman) grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Qinqin Foodstuffs Group (Cayman) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Qinqin Foodstuffs Group (Cayman) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Qinqin Foodstuffs Group (Cayman) actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Qinqin Foodstuffs Group (Cayman)'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¥417.2m. And we liked the look of last year's 58% year-on-year EBIT growth. So we are not troubled with Qinqin Foodstuffs Group (Cayman)'s debt use. 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 Qinqin Foodstuffs Group (Cayman) , 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.

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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.