Arrail Group (HKG:6639) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Arrail Group Limited (HKG:6639) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Arrail Group Carry?

As you can see below, at the end of March 2025, Arrail Group had CN¥442.1m of debt, up from CN¥355.6m a year ago. Click the image for more detail. However, it does have CN¥1.09b in cash offsetting this, leading to net cash of CN¥644.9m.

How Healthy Is Arrail Group's Balance Sheet?

We can see from the most recent balance sheet that Arrail Group had liabilities of CN¥914.8m falling due within a year, and liabilities of CN¥462.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.09b as well as receivables valued at CN¥218.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥71.9m.

Of course, Arrail Group has a market capitalization of CN¥1.16b, so these liabilities are probably manageable. 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, Arrail Group boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Arrail Group

Pleasingly, Arrail Group is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 537% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Arrail Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Arrail Group 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. Happily for any shareholders, Arrail Group actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Arrail Group has CN¥644.9m in net cash. The cherry on top was that in converted 999% of that EBIT to free cash flow, bringing in CN¥173m. So is Arrail Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Arrail 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.

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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.