These 4 Measures Indicate That Meitu (HKG:1357) Is Using Debt Safely

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. Importantly, Meitu, Inc. (HKG:1357) does carry debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Meitu's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Meitu had CN¥266.5m of debt, an increase on CN¥149.6m, over one year. However, it does have CN¥2.96b in cash offsetting this, leading to net cash of CN¥2.69b.

A Look At Meitu's Liabilities

Zooming in on the latest balance sheet data, we can see that Meitu had liabilities of CN¥1.82b due within 12 months and liabilities of CN¥193.9m due beyond that. On the other hand, it had cash of CN¥2.96b and CN¥407.0m worth of receivables due within a year. So it actually has CN¥1.35b more liquid assets than total liabilities.

This short term liquidity is a sign that Meitu could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Meitu has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Meitu

In addition to that, we're happy to report that Meitu has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. 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 Meitu'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. While Meitu 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, Meitu 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 investigate a company's debt, in this case Meitu has CN¥2.69b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in CN¥693m. So we don't think Meitu's use of debt is risky. 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. We've identified 3 warning signs with Meitu , and understanding them should be part of your investment process.

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.