David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kidswant Children Products Co.,Ltd. (SZSE:301078) does carry debt. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Kidswant Children ProductsLtd's Net Debt?
As you can see below, at the end of June 2024, Kidswant Children ProductsLtd had CN¥2.08b of debt, up from CN¥430.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥3.97b in cash, leading to a CN¥1.89b net cash position.
A Look At Kidswant Children ProductsLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Kidswant Children ProductsLtd had liabilities of CN¥2.91b due within 12 months and liabilities of CN¥3.30b due beyond that. On the other hand, it had cash of CN¥3.97b and CN¥248.4m worth of receivables due within a year. So its liabilities total CN¥1.99b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Kidswant Children ProductsLtd is worth CN¥5.46b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Kidswant Children ProductsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
Importantly, Kidswant Children ProductsLtd grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kidswant Children ProductsLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Kidswant Children ProductsLtd 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. Over the last three years, Kidswant Children ProductsLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
Although Kidswant Children ProductsLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.89b. And it impressed us with free cash flow of CN¥1.0b, being 295% of its EBIT. So we don't think Kidswant Children ProductsLtd'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, we've discovered 2 warning signs for Kidswant Children ProductsLtd that you should be aware of before investing here.
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.
