These 4 Measures Indicate That Qunabox Group (HKG:917) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Qunabox Group Limited (HKG:917) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Qunabox Group Carry?

You can click the graphic below for the historical numbers, but it shows that Qunabox Group had CN¥426.8m of debt in December 2024, down from CN¥1.39b, one year before. However, it does have CN¥1.16b in cash offsetting this, leading to net cash of CN¥737.7m.

How Healthy Is Qunabox Group's Balance Sheet?

We can see from the most recent balance sheet that Qunabox Group had liabilities of CN¥538.6m falling due within a year, and liabilities of CN¥2.05m due beyond that. Offsetting this, it had CN¥1.16b in cash and CN¥510.0m in receivables that were due within 12 months. So it can boast CN¥1.13b more liquid assets than total liabilities.

This surplus suggests that Qunabox Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Qunabox Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Qunabox Group

In addition to that, we're happy to report that Qunabox Group has boosted its EBIT by 33%, 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 Qunabox Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Qunabox Group 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. In the last three years, Qunabox Group created free cash flow amounting to 9.4% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qunabox Group has CN¥737.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 33% over the last year. So is Qunabox Group's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Qunabox Group insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.