XD (HKG:2400) Has Debt But No Earnings; Should You Worry?

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. We can see that XD Inc. (HKG:2400) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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.

See our latest analysis for XD

How Much Debt Does XD Carry?

The image below, which you can click on for greater detail, shows that at June 2022 XD had debt of CN¥1.79b, up from CN¥1.69b in one year. However, its balance sheet shows it holds CN¥3.79b in cash, so it actually has CN¥2.01b net cash.

How Strong Is XD's Balance Sheet?

According to the last reported balance sheet, XD had liabilities of CN¥1.03b due within 12 months, and liabilities of CN¥1.88b due beyond 12 months. Offsetting this, it had CN¥3.79b in cash and CN¥280.3m in receivables that were due within 12 months. So it actually has CN¥1.17b more liquid assets than total liabilities.

This surplus suggests that XD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, XD boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if XD 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.

In the last year XD wasn't profitable at an EBIT level, but managed to grow its revenue by 4.8%, to CN¥2.9b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is XD?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year XD had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥623m and booked a CN¥925m accounting loss. With only CN¥2.01b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like XD I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.