Chinese literature (HKG: 772) has a rock solid track record


Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Limited Chinese literature (HKG: 772) uses debt. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. 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 their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest analysis for Chinese literature

What is the net debt of Chinese literature?

The image below, which you can click for more details, shows that China Literature had a debt of CN ¥ 1.22b at the end of June 2021, a reduction of CN ¥ 1.86b over one year. However, he has CN 6.91 billion in cash offsetting this, which leads to a net cash position of CN 5.69 billion.

SEHK: 772 History of debt to equity August 24, 2021

A look at the responsibilities of Chinese literature

The latest balance sheet data shows that China Literature had liabilities of CN 4.52 billion due within one year and liabilities of CN 1.71 billion due after that. On the other hand, he had a cash position of CN 6.91 billion and CN 3.36 billion in receivables due within one year. So he actually CN ¥ 4.04b Following liquid assets as total liabilities.

This surplus suggests that China Literature has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. In short, China Literature claims a clean cash flow, so it’s fair to say that it doesn’t have a lot of debt!

On top of that, we are happy to report that China Literature has increased its EBIT by 76%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether China Literature can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Chinese literature may have net liquidity 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. capacity. to manage debt. Over the past three years, China Literature has generated free cash flow of a very solid 92% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.

In summary

While we sympathize with investors who find debt of concern, you should keep in mind that China Literature has net liquidity of 5.69 billion yen, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CNN 718 million, or 92% of its EBIT. We therefore do not believe that Chinese literature’s use of debt is risky. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Chinese literature you should know.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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