We Think Pop Mart International Group (HKG:9992) Can Manage Its Debt With Ease

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 can see that Pop Mart International Group Limited (HKG:9992) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pop Mart International Group

What Is Pop Mart International Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Pop Mart International Group had CN¥15.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥5.97b in cash, so it actually has CN¥5.96b net cash.

How Strong Is Pop Mart International Group's Balance Sheet?

According to the last reported balance sheet, Pop Mart International Group had liabilities of CN¥1.73b due within 12 months, and liabilities of CN¥455.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.97b as well as receivables valued at CN¥406.5m due within 12 months. So it can boast CN¥4.19b more liquid assets than total liabilities.

This short term liquidity is a sign that Pop Mart International Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pop Mart International Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Pop Mart International Group grew its EBIT by 129% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Pop Mart International Group's ability to maintain a healthy balance sheet going forward. 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. Pop Mart International 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. During the last three years, Pop Mart International Group generated free cash flow amounting to a very robust 89% 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 Pop Mart International Group has net cash of CN¥5.96b, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in CN¥1.6b. So is Pop Mart International Group's debt a risk? It doesn't seem so to us. We'd be very excited to see if Pop Mart International Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.