We believe Chinese literature (HKG: 772) can handle its debt with ease

Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. Like many other companies China Literature Limited (HKG: 772) uses debt. But does this debt worry shareholders?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest analysis of Chinese literature

What is the debt of Chinese literature?

As you can see below, Chinese literature had a debt of 1.25 billion yen in December 2020, up from 1.30 billion yen the year before. However, his balance sheet shows that he holds 6.26 billion yen in cash, so he actually has 5.01 billion yen in cash.

SEHK: 772 Debt / Equity Historical May 24, 2021

How strong is the record of Chinese literature?

We can see from the most recent balance sheet that Chinese literature had commitments of 4.22 billion yen due one year and commitments of 2.00 billion yen beyond. In return, he had 6.26 billion yen in cash and 3.61 billion yen in receivables due within 12 months. So he actually has CNY 3.65 billion After liquid assets than total liabilities.

This surplus suggests that Chinese literature has a prudent balance sheet and could probably eliminate its debt without too much difficulty. Put simply, the fact that Chinese literature has more cash than debt is arguably a good indication that it can handle debt safely.

In addition, China Literature has increased its EBIT by 30% over the past twelve months, and this growth will make it easier to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is the future profits, more than anything, that will determine the ability of Chinese literature to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Finally, a business can only pay off its debts with cash, not book profits. Chinese literature may have net cash on the balance sheet, but it is always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its business. ability to manage debt. Over the past three years, China Literature has generated free cash flow of 94% of its very robust EBIT, more than expected. This puts him in a very strong position to pay off his debt.

To summarize

While it still makes sense to investigate a company’s debt, in this case Chinese literature has 5.01 billion yen in net cash and a decent-looking balance sheet. Best of all, in converted 94% of that EBIT into free cash flow, which brought in 822 million yen. So is China Literature’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for Chinese literature which you should be aware of before investing here.

If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then take a quick look at our list of Net Cash Growth Stocks.

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