Does Xinhua Lande Scitech (HKG:8106) Have A Healthy Balance Sheet?

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. We can see that Xinhua Lande Scitech Co., Limited (HKG:8106) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Xinhua Lande Scitech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Xinhua Lande Scitech had CN¥28.5m of debt, an increase on CN¥12.1m, over one year. However, because it has a cash reserve of CN¥9.81m, its net debt is less, at about CN¥18.7m.

How Healthy Is Xinhua Lande Scitech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xinhua Lande Scitech had liabilities of CN¥83.6m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of CN¥9.81m and CN¥102.0m worth of receivables due within a year. So it actually has CN¥28.2m more liquid assets than total liabilities.

This excess liquidity suggests that Xinhua Lande Scitech is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders.

Check out our latest analysis for Xinhua Lande Scitech

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Xinhua Lande Scitech's debt is 4.8 times its EBITDA, and its EBIT cover its interest expense 4.9 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Notably, Xinhua Lande Scitech made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥3.3m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xinhua Lande Scitech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Xinhua Lande Scitech saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Xinhua Lande Scitech's struggle to convert EBIT to free cash flow had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. But on the bright side, its ability to to handle its total liabilities isn't too shabby at all. Looking at all the angles mentioned above, it does seem to us that Xinhua Lande Scitech is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. For example, we've discovered 3 warning signs for Xinhua Lande Scitech (1 is concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.