Qilu Expressway (HKG:1576) Has A Rock Solid 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. As with many other companies Qilu Expressway Company Limited (HKG:1576) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Qilu Expressway

What Is Qilu Expressway's Debt?

As you can see below, Qilu Expressway had CN¥165.0m of debt at June 2020, down from CN¥460.0m a year prior. However, it does have CN¥1.69b in cash offsetting this, leading to net cash of CN¥1.52b.

How Strong Is Qilu Expressway's Balance Sheet?

The latest balance sheet data shows that Qilu Expressway had liabilities of CN¥738.8m due within a year, and liabilities of CN¥107.9m falling due after that. On the other hand, it had cash of CN¥1.69b and CN¥23.8m worth of receivables due within a year. So it actually has CN¥865.8m more liquid assets than total liabilities.

It's good to see that Qilu Expressway has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Qilu Expressway has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Qilu Expressway saw its EBIT drop by 7.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Qilu Expressway'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Qilu Expressway 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. Over the last three years, Qilu Expressway actually produced more free cash flow than EBIT. 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 Qilu Expressway has net cash of CN¥1.52b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥557m, being 111% of its EBIT. So is Qilu Expressway'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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Qilu Expressway you should be aware of.

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.

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