These 4 Measures Indicate That Be Friends Holding (HKG:1450) Is Using Debt Reasonably Well

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Be Friends Holding Limited (HKG:1450) does carry debt. But the real question is whether this debt is making the company risky.

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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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Be Friends Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Be Friends Holding had CN¥20.0m of debt in June 2025, down from CN¥196.3m, one year before. But it also has CN¥235.6m in cash to offset that, meaning it has CN¥215.6m net cash.

How Healthy Is Be Friends Holding's Balance Sheet?

We can see from the most recent balance sheet that Be Friends Holding had liabilities of CN¥505.6m falling due within a year, and liabilities of CN¥17.3m due beyond that. Offsetting this, it had CN¥235.6m in cash and CN¥224.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥63.0m more than its cash and near-term receivables, combined.

Of course, Be Friends Holding has a market capitalization of CN¥1.33b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Be Friends Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Be Friends Holding

It is just as well that Be Friends Holding's load is not too heavy, because its EBIT was down 55% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Be Friends Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Be Friends Holding 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. Over the most recent three years, Be Friends Holding recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Be Friends Holding's liabilities, but we can be reassured by the fact it has has net cash of CN¥215.6m. And it impressed us with free cash flow of CN¥72m, being 77% of its EBIT. So we don't have any problem with Be Friends Holding's use of debt. 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 1 warning sign with Be Friends Holding , 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.