Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that XIANGPIAOPIAO Food Co.,Ltd (SHSE:603711) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is XIANGPIAOPIAO FoodLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that XIANGPIAOPIAO FoodLtd had CN¥693.5m of debt in March 2024, down from CN¥971.0m, one year before. However, its balance sheet shows it holds CN¥2.44b in cash, so it actually has CN¥1.75b net cash.

A Look At XIANGPIAOPIAO FoodLtd's Liabilities

According to the last reported balance sheet, XIANGPIAOPIAO FoodLtd had liabilities of CN¥1.17b due within 12 months, and liabilities of CN¥95.0m due beyond 12 months. Offsetting this, it had CN¥2.44b in cash and CN¥38.8m in receivables that were due within 12 months. So it can boast CN¥1.22b more liquid assets than total liabilities.

This excess liquidity suggests that XIANGPIAOPIAO FoodLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, XIANGPIAOPIAO FoodLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that XIANGPIAOPIAO FoodLtd has seen its EBIT plunge 18% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if XIANGPIAOPIAO FoodLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While XIANGPIAOPIAO FoodLtd 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, XIANGPIAOPIAO FoodLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that XIANGPIAOPIAO FoodLtd has net cash of CN¥1.75b, as well as more liquid assets than liabilities. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in CN¥455m. So we don't think XIANGPIAOPIAO FoodLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with XIANGPIAOPIAO FoodLtd .

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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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