We Think Xtep International Holdings (HKG:1368) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Xtep International Holdings Limited (HKG:1368) does carry debt. But the real question is whether this debt is making the company risky.

We've discovered 1 warning sign about Xtep International Holdings. View them for free.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Xtep International Holdings's Debt?

As you can see below, Xtep International Holdings had CN¥2.96b of debt at December 2024, down from CN¥3.60b a year prior. However, it does have CN¥2.98b in cash offsetting this, leading to net cash of CN¥21.4m.

How Healthy Is Xtep International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Xtep International Holdings had liabilities of CN¥5.28b falling due within a year, and liabilities of CN¥1.98b due beyond that. On the other hand, it had cash of CN¥2.98b and CN¥5.01b worth of receivables due within a year. So it actually has CN¥724.9m more liquid assets than total liabilities.

This surplus suggests that Xtep International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xtep International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Xtep International Holdings

And we also note warmly that Xtep International Holdings grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Xtep International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xtep International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Xtep International Holdings recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xtep International Holdings has CN¥21.4m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 11% over the last year. So is Xtep International Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Xtep International Holdings has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.