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

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.' 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. Importantly, Qinqin Foodstuffs Group (Cayman) Company Limited (HKG:1583) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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.

Check out 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 June 2023 Qinqin Foodstuffs Group (Cayman) had debt of CN¥302.0m, up from CN¥49.8m in one year. However, it does have CN¥413.9m in cash offsetting this, leading to net cash of CN¥111.9m.

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

According to the last reported balance sheet, Qinqin Foodstuffs Group (Cayman) had liabilities of CN¥395.8m due within 12 months, and liabilities of CN¥289.5m due beyond 12 months. Offsetting this, it had CN¥413.9m in cash and CN¥47.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥224.3m more than its cash and near-term receivables, combined.

Qinqin Foodstuffs Group (Cayman) has a market capitalization of CN¥577.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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!

Although Qinqin Foodstuffs Group (Cayman) made a loss at the EBIT level, last year, it was also good to see that it generated CN¥28m in EBIT over the last twelve months. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last year, 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

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¥111.9m. So while Qinqin Foodstuffs Group (Cayman) does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Qinqin Foodstuffs Group (Cayman) you should know about.

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.