Qinqin Foodstuffs Group (Cayman) (HKG:1583) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Qinqin Foodstuffs Group (Cayman) Company Limited (HKG:1583) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Qinqin Foodstuffs Group (Cayman)

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¥271.9m at the end of June 2024, a reduction from CN¥302.0m over a year. But it also has CN¥500.1m in cash to offset that, meaning it has CN¥228.3m net cash.

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

We can see from the most recent balance sheet that Qinqin Foodstuffs Group (Cayman) had liabilities of CN¥407.4m falling due within a year, and liabilities of CN¥202.0m due beyond that. Offsetting this, it had CN¥500.1m in cash and CN¥18.9m in receivables that were due within 12 months. So its liabilities total CN¥90.3m more than the combination of its cash and short-term receivables.

Of course, Qinqin Foodstuffs Group (Cayman) has a market capitalization of CN¥681.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Qinqin Foodstuffs Group (Cayman) also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Qinqin Foodstuffs Group (Cayman)'s saving grace is its low debt levels, because its EBIT has tanked 89% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. 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. While Qinqin Foodstuffs Group (Cayman) 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 two years, Qinqin Foodstuffs Group (Cayman) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Qinqin Foodstuffs Group (Cayman) does have more liabilities than liquid assets, it also has net cash of CN¥228.3m. So while Qinqin Foodstuffs Group (Cayman) does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Qinqin Foodstuffs Group (Cayman) (of which 1 is significant!) 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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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.