Central China New Life (HKG:9983) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Central China New Life Limited (HKG:9983) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Central China New Life's Debt?

As you can see below, Central China New Life had CN¥52.0m of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥835.6m in cash, leading to a CN¥783.6m net cash position.

How Strong Is Central China New Life's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Central China New Life had liabilities of CN¥2.30b due within 12 months and liabilities of CN¥134.6m due beyond that. Offsetting these obligations, it had cash of CN¥835.6m as well as receivables valued at CN¥2.90b due within 12 months. So it can boast CN¥1.30b more liquid assets than total liabilities.

This luscious liquidity implies that Central China New Life's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Central China New Life boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Central China New Life

It was also good to see that despite losing money on the EBIT line last year, Central China New Life turned things around in the last 12 months, delivering and EBIT of CN¥321m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Central China New Life will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Central China New Life 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 last year, Central China New Life recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Central China New Life has CN¥783.6m in net cash and a strong balance sheet. So is Central China New Life's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Central China New Life (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.