Here's Why China Qidian Guofeng Holdings (HKG:1280) Can Afford Some Debt

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.' 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 note that China Qidian Guofeng Holdings Limited (HKG:1280) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China Qidian Guofeng Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that China Qidian Guofeng Holdings had CN¥109.8m of debt in December 2024, down from CN¥471.2m, one year before. However, because it has a cash reserve of CN¥29.2m, its net debt is less, at about CN¥80.6m.

A Look At China Qidian Guofeng Holdings' Liabilities

According to the last reported balance sheet, China Qidian Guofeng Holdings had liabilities of CN¥254.3m due within 12 months, and liabilities of CN¥131.6m due beyond 12 months. Offsetting this, it had CN¥29.2m in cash and CN¥10.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥345.7m.

Since publicly traded China Qidian Guofeng Holdings shares are worth a total of CN¥6.37b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, China Qidian Guofeng Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is China Qidian Guofeng Holdings'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.

View our latest analysis for China Qidian Guofeng Holdings

In the last year China Qidian Guofeng Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to CN¥442m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though China Qidian Guofeng Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥27m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥48m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for China Qidian Guofeng Holdings (3 can't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.