These 4 Measures Indicate That Edensoft Holdings (HKG:1147) Is Using Debt Reasonably Well

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.' 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. As with many other companies Edensoft Holdings Limited (HKG:1147) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Edensoft Holdings

How Much Debt Does Edensoft Holdings Carry?

The image below, which you can click on for greater detail, shows that Edensoft Holdings had debt of CN¥34.0m at the end of June 2024, a reduction from CN¥49.5m over a year. But it also has CN¥175.8m in cash to offset that, meaning it has CN¥141.8m net cash.

How Healthy Is Edensoft Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Edensoft Holdings had liabilities of CN¥386.3m due within 12 months and liabilities of CN¥2.56m due beyond that. Offsetting this, it had CN¥175.8m in cash and CN¥242.4m in receivables that were due within 12 months. So it can boast CN¥29.2m more liquid assets than total liabilities.

It's good to see that Edensoft Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Edensoft Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Edensoft Holdings improved its EBIT from a last year's loss to a positive CN¥2.0m. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Edensoft Holdings 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. Happily for any shareholders, Edensoft Holdings actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Edensoft Holdings has CN¥141.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 7,463% of that EBIT to free cash flow, bringing in CN¥147m. So we don't think Edensoft Holdings's use of debt is risky. 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. For instance, we've identified 2 warning signs for Edensoft Holdings (1 is a bit unpleasant) 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.