Health Check: How Prudently Does Lifestyle China Group (HKG:2136) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Lifestyle China Group Limited (HKG:2136) does use debt in its business. But is this debt a concern to shareholders?

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, 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 Lifestyle China Group

How Much Debt Does Lifestyle China Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Lifestyle China Group had CN¥3.34b of debt, an increase on CN¥2.28b, over one year. On the flip side, it has CN¥2.82b in cash leading to net debt of about CN¥518.2m.

How Strong Is Lifestyle China Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lifestyle China Group had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥4.87b due beyond that. Offsetting this, it had CN¥2.82b in cash and CN¥307.4m in receivables that were due within 12 months. So its liabilities total CN¥2.89b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥1.19b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Lifestyle China Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Lifestyle China 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.

Over 12 months, Lifestyle China Group reported revenue of CN¥1.3b, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Lifestyle China Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥88m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥382m and the profit of CN¥88m. So one might argue that there's still a chance it can get things on the right track. 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 instance, we've identified 1 warning sign for Lifestyle China Group that you should be aware of.

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.

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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.

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