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.' 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. We can see that Mao Geping Cosmetics Co., Ltd. (HKG:1318) does use debt in its business. But is this debt a concern to shareholders?
Our free stock report includes 1 warning sign investors should be aware of before investing in Mao Geping Cosmetics. Read for free now.Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Mao Geping Cosmetics's Net Debt?
As you can see below, at the end of December 2024, Mao Geping Cosmetics had CN¥320.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.82b in cash, so it actually has CN¥2.50b net cash.
How Strong Is Mao Geping Cosmetics' Balance Sheet?
We can see from the most recent balance sheet that Mao Geping Cosmetics had liabilities of CN¥951.4m falling due within a year, and liabilities of CN¥18.6m due beyond that. Offsetting these obligations, it had cash of CN¥2.82b as well as receivables valued at CN¥215.0m due within 12 months. So it actually has CN¥2.06b more liquid assets than total liabilities.
This surplus suggests that Mao Geping Cosmetics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Mao Geping Cosmetics boasts net cash, so it's fair to say it does not have a heavy debt load!
See our latest analysis for Mao Geping Cosmetics
On top of that, Mao Geping Cosmetics grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mao Geping Cosmetics'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 company can only pay off debt with cold hard cash, not accounting profits. While Mao Geping Cosmetics 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 most recent three years, Mao Geping Cosmetics recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Mao Geping Cosmetics has net cash of CN¥2.50b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 31% over the last year. So we don't think Mao Geping Cosmetics's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Mao Geping Cosmetics that you should be aware of before investing here.
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.