China SpacesatLtd (SHSE:600118) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that China Spacesat Co.,Ltd. (SHSE:600118) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, together.

Check out our latest analysis for China SpacesatLtd

How Much Debt Does China SpacesatLtd Carry?

As you can see below, at the end of September 2023, China SpacesatLtd had CN¥187.4m of debt, up from CN¥178.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.79b in cash, leading to a CN¥2.60b net cash position.

A Look At China SpacesatLtd's Liabilities

We can see from the most recent balance sheet that China SpacesatLtd had liabilities of CN¥6.23b falling due within a year, and liabilities of CN¥388.0m due beyond that. Offsetting these obligations, it had cash of CN¥2.79b as well as receivables valued at CN¥5.72b due within 12 months. So it can boast CN¥1.90b more liquid assets than total liabilities.

This surplus suggests that China SpacesatLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China SpacesatLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that China SpacesatLtd's load is not too heavy, because its EBIT was down 47% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 China SpacesatLtd 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 China SpacesatLtd 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 last three years, China SpacesatLtd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case China SpacesatLtd has CN¥2.60b in net cash and a decent-looking balance sheet. So we don't have any problem with China SpacesatLtd's use of debt. 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 instance, we've identified 2 warning signs for China SpacesatLtd that you should be aware of.

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.