Is China SpacesatLtd (SHSE:600118) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China SpacesatLtd

What Is China SpacesatLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that China SpacesatLtd had CN¥206.2m of debt in March 2024, down from CN¥215.0m, one year before. But it also has CN¥2.08b in cash to offset that, meaning it has CN¥1.88b net cash.

How Healthy Is China SpacesatLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China SpacesatLtd had liabilities of CN¥4.95b due within 12 months and liabilities of CN¥392.7m due beyond that. Offsetting this, it had CN¥2.08b in cash and CN¥5.22b in receivables that were due within 12 months. So it can boast CN¥1.96b more liquid assets than total liabilities.

This short term liquidity is a sign that China SpacesatLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China SpacesatLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for China SpacesatLtd if management cannot prevent a repeat of the 90% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine China SpacesatLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, China SpacesatLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China SpacesatLtd has net cash of CN¥1.88b, as well as more liquid assets than liabilities. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in -CN¥1.0b. 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. To that end, you should be aware of the 2 warning signs we've spotted with China SpacesatLtd .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com