Qinqin Foodstuffs Group (Cayman) (HKG:1583) Takes On Some Risk With Its Use Of Debt

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.' 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 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?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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)

How Much Debt Does Qinqin Foodstuffs Group (Cayman) Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Qinqin Foodstuffs Group (Cayman) had debt of CN¥228.0m, up from CN¥97.4m in one year. But it also has CN¥537.0m in cash to offset that, meaning it has CN¥308.9m net cash.

A Look At Qinqin Foodstuffs Group (Cayman)'s Liabilities

The latest balance sheet data shows that Qinqin Foodstuffs Group (Cayman) had liabilities of CN¥626.9m due within a year, and liabilities of CN¥195.2m falling due after that. Offsetting these obligations, it had cash of CN¥537.0m as well as receivables valued at CN¥8.22m due within 12 months. So its liabilities total CN¥276.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Qinqin Foodstuffs Group (Cayman) has a market capitalization of CN¥789.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Although Qinqin Foodstuffs Group (Cayman) made a loss at the EBIT level, last year, it was also good to see that it generated CN¥13m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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. During the last year, Qinqin Foodstuffs Group (Cayman) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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¥308.9m. So while Qinqin Foodstuffs Group (Cayman) does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Qinqin Foodstuffs Group (Cayman) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.