Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. It’s only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that China Beststudy Education Group (HKG: 3978) uses debt in its business. But does this debt worry shareholders?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for China Beststudy Education Group
What is the debt of the China Beststudy Education Group?
The image below, which you can click for more details, shows that in June 2021, China Beststudy Education Group had a debt of CN 355.3 million, compared to CN 251.5 million in one year. But on the other hand, it also has CN 1.48 billion in cash, which leads to a net cash position of CN 1.13 billion.
How strong is China Beststudy Education Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that China Beststudy Education Group had CN 1.65 billion liabilities due within 12 months and CN 973.8 million liabilities beyond. In compensation for these obligations, he had cash of CND 1.48 billion as well as receivables valued at CN 50.1 million due within 12 months. Its liabilities therefore total CNN 1.09 billion more than the combination of its cash and short-term receivables.
The lack here weighs heavily on the CN 243.1million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. . We therefore believe that shareholders should monitor it closely. After all, China Beststudy Education Group would likely need a major recapitalization if it were to pay its creditors today. China Beststudy Education Group has net liquidity, so it’s fair to say that it doesn’t have heavy debt, even though it does have very large liabilities, in total.
If China Beststudy Education Group can continue to increase its EBIT at the rate of 20% last year compared to last year, then it will find its debt more manageable. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt in isolation; since China Beststudy Education Group will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. China Beststudy Education Group may have net cash on the balance sheet, but it is always interesting to consider how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs. and its ability to manage debt. Fortunately for all shareholders, China Beststudy Education Group has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good favor of your lenders.
Although China Beststudy Education Group’s balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has net cash of 1.13b CN. The icing on the cake was that he converted 325% of that EBIT into free cash flow, bringing in CND 647 million. So we have no problem with the use of debt by the China Beststudy Education Group. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – China Beststudy Education Group has 5 warning signs we think you should be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.