Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Center International Group Co.,Ltd. (SHSE:603098) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Center International GroupLtd's Debt?
The image below, which you can click on for greater detail, shows that Center International GroupLtd had debt of CN¥961.3m at the end of March 2024, a reduction from CN¥1.40b over a year. But on the other hand it also has CN¥1.06b in cash, leading to a CN¥99.8m net cash position.
How Strong Is Center International GroupLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Center International GroupLtd had liabilities of CN¥3.05b due within 12 months and liabilities of CN¥258.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.06b as well as receivables valued at CN¥3.69b due within 12 months. So it can boast CN¥1.44b more liquid assets than total liabilities.
This excess liquidity suggests that Center International GroupLtd is taking a careful approach to debt. 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 Center International GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
Also relevant is that Center International GroupLtd has grown its EBIT by a very respectable 23% in the last year, thus enhancing its ability to pay down debt. 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 Center International GroupLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Center International GroupLtd 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, Center International GroupLtd actually produced more free cash flow than EBIT. 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 Center International GroupLtd has CN¥99.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥268m, being 156% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Center International GroupLtd that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.