CIFI Ever Sunshine Services Group (HKG:1995) Seems To Use Debt Rather Sparingly

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. As with many other companies CIFI Ever Sunshine Services Group Limited (HKG:1995) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that 1995 is potentially undervalued!

How Much Debt Does CIFI Ever Sunshine Services Group Carry?

As you can see below, at the end of June 2022, CIFI Ever Sunshine Services Group had CN¥28.9m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥4.40b in cash to offset that, meaning it has CN¥4.37b net cash.

A Look At CIFI Ever Sunshine Services Group's Liabilities

The latest balance sheet data shows that CIFI Ever Sunshine Services Group had liabilities of CN¥2.85b due within a year, and liabilities of CN¥133.9m falling due after that. Offsetting this, it had CN¥4.40b in cash and CN¥1.27b in receivables that were due within 12 months. So it actually has CN¥2.69b more liquid assets than total liabilities.

This surplus strongly suggests that CIFI Ever Sunshine Services Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, CIFI Ever Sunshine Services Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that CIFI Ever Sunshine Services Group has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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 CIFI Ever Sunshine Services Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CIFI Ever Sunshine Services Group 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. During the last three years, CIFI Ever Sunshine Services Group generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CIFI Ever Sunshine Services Group has net cash of CN¥4.37b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥511m, being 92% of its EBIT. At the end of the day we're not concerned about CIFI Ever Sunshine Services Group's debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for CIFI Ever Sunshine Services Group (1 is concerning!) that you should be aware of before investing here.

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.

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.