Edensoft Holdings (HKG:1147) Could Easily Take On More Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Edensoft Holdings Limited (HKG:1147) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Edensoft Holdings's Debt?

The image below, which you can click on for greater detail, shows that Edensoft Holdings had debt of CN¥38.0m at the end of December 2024, a reduction from CN¥48.2m over a year. But it also has CN¥94.6m in cash to offset that, meaning it has CN¥56.6m net cash.

How Strong Is Edensoft Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Edensoft Holdings had liabilities of CN¥235.6m due within 12 months and liabilities of CN¥1.30m due beyond that. Offsetting this, it had CN¥94.6m in cash and CN¥185.0m in receivables that were due within 12 months. So it can boast CN¥42.7m more liquid assets than total liabilities.

This surplus suggests that Edensoft Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Edensoft Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Edensoft Holdings

Notably, Edensoft Holdings's EBIT launched higher than Elon Musk, gaining a whopping 1,245% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is Edensoft 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Edensoft Holdings 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. Happily for any shareholders, Edensoft Holdings actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Edensoft Holdings has net cash of CN¥56.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in CN¥94m. So is Edensoft Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Edensoft Holdings (including 1 which is significant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.