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.' 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. As with many other companies Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Xiabuxiabu Catering Management (China) Holdings

What Is Xiabuxiabu Catering Management (China) Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Xiabuxiabu Catering Management (China) Holdings had CN¥30.0m of debt in June 2022, down from CN¥50.7m, one year before. But it also has CN¥779.0m in cash to offset that, meaning it has CN¥749.0m net cash.

How Strong Is Xiabuxiabu Catering Management (China) Holdings' Balance Sheet?

The latest balance sheet data shows that Xiabuxiabu Catering Management (China) Holdings had liabilities of CN¥1.68b due within a year, and liabilities of CN¥1.04b falling due after that. On the other hand, it had cash of CN¥779.0m and CN¥324.3m worth of receivables due within a year. So it has liabilities totalling CN¥1.61b more than its cash and near-term receivables, combined.

Xiabuxiabu Catering Management (China) Holdings has a market capitalization of CN¥3.54b, 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. While it does have liabilities worth noting, Xiabuxiabu Catering Management (China) Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Xiabuxiabu Catering Management (China) Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Xiabuxiabu Catering Management (China) Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥5.3b. That makes us nervous, to say the least.

So How Risky Is Xiabuxiabu Catering Management (China) Holdings?

Although Xiabuxiabu Catering Management (China) Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥451m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Xiabuxiabu Catering Management (China) Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.