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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Xin Point Holdings Limited (HKG:1571) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Xin Point Holdings

What Is Xin Point Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Xin Point Holdings had CN¥81.5m of debt in June 2022, down from CN¥146.7m, one year before. But it also has CN¥151.9m in cash to offset that, meaning it has CN¥70.4m net cash.

How Strong Is Xin Point Holdings' Balance Sheet?

The latest balance sheet data shows that Xin Point Holdings had liabilities of CN¥823.3m due within a year, and liabilities of CN¥91.4m falling due after that. Offsetting these obligations, it had cash of CN¥151.9m as well as receivables valued at CN¥720.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥42.3m.

This state of affairs indicates that Xin Point Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥2.19b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Xin Point Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Xin Point Holdings's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Xin Point 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xin Point Holdings 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, Xin Point Holdings recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Xin Point Holdings has CN¥70.4m in net cash. So although we see some areas for improvement, we're not too worried about Xin Point Holdings's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Xin Point Holdings you should be aware of.

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.