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Is XD (HKG:2400) Using Too Much Debt?

Simply Wall St ·  11/07/2023 06:20

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.' 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. Importantly, XD Inc. (HKG:2400) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for XD

What Is XD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 XD had CN¥1.91b of debt, an increase on CN¥1.79b, over one year. But on the other hand it also has CN¥3.73b in cash, leading to a CN¥1.82b net cash position.

debt-equity-history-analysis
SEHK:2400 Debt to Equity History November 6th 2023

How Healthy Is XD's Balance Sheet?

According to the last reported balance sheet, XD had liabilities of CN¥2.62b due within 12 months, and liabilities of CN¥177.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.73b as well as receivables valued at CN¥252.7m due within 12 months. So it actually has CN¥1.19b more liquid assets than total liabilities.

This surplus suggests that XD is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that XD has more cash than debt is arguably a good indication that 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 XD'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.

Over 12 months, XD reported revenue of CN¥3.6b, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is XD?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that XD had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥65m and booked a CN¥77m accounting loss. With only CN¥1.82b on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, XD may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like XD I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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