Here's Why Shanghai Chicmax Cosmetic (HKG:2145) Can Manage Its Debt Responsibly

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. Importantly, Shanghai Chicmax Cosmetic Co., Ltd. (HKG:2145) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Shanghai Chicmax Cosmetic

What Is Shanghai Chicmax Cosmetic's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Chicmax Cosmetic had CN¥100.0m of debt in December 2023, down from CN¥650.4m, one year before. But on the other hand it also has CN¥914.5m in cash, leading to a CN¥814.5m net cash position.

How Strong Is Shanghai Chicmax Cosmetic's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Chicmax Cosmetic had liabilities of CN¥1.05b falling due within a year, and liabilities of CN¥48.2m due beyond that. On the other hand, it had cash of CN¥914.5m and CN¥321.2m worth of receivables due within a year. So it can boast CN¥136.1m more liquid assets than total liabilities.

Having regard to Shanghai Chicmax Cosmetic's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥17.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Shanghai Chicmax Cosmetic boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shanghai Chicmax Cosmetic grew its EBIT by 636% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Chicmax Cosmetic's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Chicmax Cosmetic 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. Looking at the most recent three years, Shanghai Chicmax Cosmetic recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Chicmax Cosmetic has net cash of CN¥814.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 636% over the last year. So we don't think Shanghai Chicmax Cosmetic's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai Chicmax Cosmetic's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.