Xtep International Holdings (HKG:1368) Seems To Use Debt Quite Sensibly
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Xtep International Holdings Limited (HKG:1368) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Xtep International Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Xtep International Holdings had CN¥2.35b of debt in June 2025, down from CN¥3.03b, one year before. However, its balance sheet shows it holds CN¥3.75b in cash, so it actually has CN¥1.39b net cash.
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¥5.77b falling due within a year, and liabilities of CN¥1.52b due beyond that. On the other hand, it had cash of CN¥3.75b and CN¥5.06b worth of receivables due within a year. So it actually has CN¥1.51b more liquid assets than total liabilities.
This short term liquidity is a sign that Xtep International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. 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
Fortunately, Xtep International Holdings grew its EBIT by 3.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Xtep International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Xtep International Holdings 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, Xtep International Holdings recorded free cash flow worth 57% 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 it is always sensible to investigate a company's debt, in this case Xtep International Holdings has CN¥1.39b in net cash and a decent-looking balance sheet. So is Xtep International Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Xtep International Holdings you should know about.
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.