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. We can see that Xueda (Xiamen) Education Technology Group Co., Ltd (SZSE:000526) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

How Much Debt Does Xueda (Xiamen) Education Technology Group Carry?

The image below, which you can click on for greater detail, shows that Xueda (Xiamen) Education Technology Group had debt of CN¥787.6m at the end of June 2024, a reduction from CN¥1.07b over a year. However, it does have CN¥863.8m in cash offsetting this, leading to net cash of CN¥76.2m.

A Look At Xueda (Xiamen) Education Technology Group's Liabilities

According to the last reported balance sheet, Xueda (Xiamen) Education Technology Group had liabilities of CN¥1.91b due within 12 months, and liabilities of CN¥703.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥863.8m as well as receivables valued at CN¥153.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.59b.

Xueda (Xiamen) Education Technology Group has a market capitalization of CN¥6.80b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Xueda (Xiamen) Education Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Xueda (Xiamen) Education Technology Group has boosted its EBIT by 88%, thus reducing the spectre of future debt repayments. 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 Xueda (Xiamen) Education Technology Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Xueda (Xiamen) Education Technology Group 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, Xueda (Xiamen) Education Technology Group actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Xueda (Xiamen) Education Technology Group does have more liabilities than liquid assets, it also has net cash of CN¥76.2m. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in CN¥475m. So we don't think Xueda (Xiamen) Education Technology Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Xueda (Xiamen) Education Technology Group's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.