Warren Buffett famously said, '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 can see that Center International Group Co.,Ltd. (SHSE:603098) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Center International GroupLtd
What Is Center International GroupLtd's Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Center International GroupLtd had debt of CN¥1.25b, up from CN¥836.2m in one year. But on the other hand it also has CN¥1.31b in cash, leading to a CN¥60.0m net cash position.
A Look At Center International GroupLtd's Liabilities
According to the last reported balance sheet, Center International GroupLtd had liabilities of CN¥3.87b due within 12 months, and liabilities of CN¥428.1m due beyond 12 months. On the other hand, it had cash of CN¥1.31b and CN¥4.20b worth of receivables due within a year. So it can boast CN¥1.21b more liquid assets than total liabilities.
It's good to see that Center International GroupLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Center International GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Center International GroupLtd grew its EBIT by 3.4% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Center International GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Center International GroupLtd 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. During the last three years, Center International GroupLtd generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While it is always sensible to investigate a company's debt, in this case Center International GroupLtd has CN¥60.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥256m, being 92% of its EBIT. So we don't think Center International GroupLtd'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. For example - Center International GroupLtd has 1 warning sign we think 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.