Does Changan Minsheng APLL Logistics (HKG:1292) Have A Healthy Balance Sheet?

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.' 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. We note that Changan Minsheng APLL Logistics Co., Ltd. (HKG:1292) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the HK Logistics industry.

What Is Changan Minsheng APLL Logistics's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Changan Minsheng APLL Logistics had debt of CN¥12.8m, up from none in one year. But it also has CN¥1.20b in cash to offset that, meaning it has CN¥1.19b net cash.

How Healthy Is Changan Minsheng APLL Logistics' Balance Sheet?

The latest balance sheet data shows that Changan Minsheng APLL Logistics had liabilities of CN¥2.08b due within a year, and liabilities of CN¥130.6m falling due after that. Offsetting these obligations, it had cash of CN¥1.20b as well as receivables valued at CN¥1.79b due within 12 months. So it can boast CN¥775.3m more liquid assets than total liabilities.

This surplus strongly suggests that Changan Minsheng APLL Logistics has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Changan Minsheng APLL Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Changan Minsheng APLL Logistics's saving grace is its low debt levels, because its EBIT has tanked 78% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Changan Minsheng APLL Logistics'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. While Changan Minsheng APLL Logistics 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, Changan Minsheng APLL Logistics actually produced more free cash flow than EBIT over the last two years. 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 Changan Minsheng APLL Logistics has CN¥1.19b in net cash and a strong balance sheet. The cherry on top was that in converted 630% of that EBIT to free cash flow, bringing in CN¥245m. So we don't think Changan Minsheng APLL Logistics's use of debt 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. To that end, you should learn about the 2 warning signs we've spotted with Changan Minsheng APLL Logistics (including 1 which can't be ignored) .

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.