Does Xiangxing International Holding (HKG:1732) Have A Healthy Balance Sheet?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Xiangxing International Holding Limited (HKG:1732) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Xiangxing International Holding
What Is Xiangxing International Holding's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Xiangxing International Holding had CN¥25.5m of debt, an increase on none, over one year. However, it does have CN¥58.6m in cash offsetting this, leading to net cash of CN¥33.0m.
How Strong Is Xiangxing International Holding's Balance Sheet?
The latest balance sheet data shows that Xiangxing International Holding had liabilities of CN¥47.4m due within a year, and liabilities of CN¥2.23m falling due after that. Offsetting this, it had CN¥58.6m in cash and CN¥66.8m in receivables that were due within 12 months. So it can boast CN¥75.8m more liquid assets than total liabilities.
It's good to see that Xiangxing International Holding has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Xiangxing International Holding 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 Xiangxing International Holding has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Xiangxing International Holding's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xiangxing International Holding 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, Xiangxing International Holding saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Xiangxing International Holding has net cash of CN¥33m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 56% over the last year. So is Xiangxing International Holding's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Xiangxing International Holding insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
