Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Marssenger Kitchenware Co., Ltd. (SZSE:300894) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Marssenger Kitchenware's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Marssenger Kitchenware had debt of CN¥866.1m, up from CN¥718.3m in one year. But on the other hand it also has CN¥1.64b in cash, leading to a CN¥772.3m net cash position.

How Healthy Is Marssenger Kitchenware's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Marssenger Kitchenware had liabilities of CN¥951.6m due within 12 months and liabilities of CN¥555.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.64b as well as receivables valued at CN¥139.0m due within 12 months. So it can boast CN¥270.2m more liquid assets than total liabilities.

This surplus suggests that Marssenger Kitchenware has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Marssenger Kitchenware has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Marssenger Kitchenware saw its EBIT drop by 9.4% 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 ultimately the future profitability of the business will decide if Marssenger Kitchenware can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Marssenger Kitchenware 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 most recent three years, Marssenger Kitchenware recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Marssenger Kitchenware has net cash of CN¥772.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥187m, being 76% of its EBIT. So we don't think Marssenger Kitchenware's use of debt is risky. 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. For instance, we've identified 2 warning signs for Marssenger Kitchenware that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com