The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, creates no bones about it when he states ‘The hugegest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we consider about how risky a company is, we always like to see at its apply of debt, since debt overload can lead to ruin. We note that 7Road Holdings Limited (HKG:797) does have debt on its balance sheet. But the real question is whether this debt is creating the company risky.
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, toreceiveher.
What Is 7Road Holdings’s Debt?
As you can see below, at the finish of June 2025, 7Road Holdings had CN¥15.0m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥122.3m in cash to offset that, meaning it has CN¥107.3m net cash.
A Look At 7Road Holdings’ Liabilities
According to the last reported balance sheet, 7Road Holdings had liabilities of CN¥123.0m due within 12 months, and liabilities of CN¥18.4m due beyond 12 months. On the other hand, it had cash of CN¥122.3m and CN¥58.7m worth of receivables due within a year. So it actually has CN¥39.6m more liquid assets than total liabilities.
This surplus suggests that 7Road Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that 7Road Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
View our latest analysis for 7Road Holdings
It was also good to see that despite losing money on the EBIT line last year, 7Road Holdings turned things around in the last 12 months, delivering and EBIT of CN¥12m. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since 7Road Holdings will necessary earnings to service that debt. So when considering debt, it’s definitely worth seeing at the earnings trfinish. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lfinishers only accept cold hard cash. 7Road Holdings may have net cash on the balance sheet, but it is still interesting to see at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, becaapply that will influence both its necessary for, and its capacity to manage debt. Over the last year, 7Road Holdings actually produced more free cash flow than EBIT. There’s nothing better than incoming cash when it comes to staying in your lfinishers’ good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that 7Road Holdings has net cash of CN¥107.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 381% of that EBIT to free cash flow, bringing in CN¥47m. So we don’t consider 7Road Holdings’s apply of debt is risky. 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 – 7Road Holdings has 2 warning signs we consider you should be aware of.
When all is declared and done, sometimes its simpler to focus on companies that don’t even necessary 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 applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focapplyd 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.
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