Is China SpacesatLtd (SHSE:600118) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that China Spacesat Co.,Ltd. (SHSE:600118) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 as of September 2024 China SpacesatLtd had CN¥326.9m of debt, an increase on CN¥187.4m, over one year. However, its balance sheet shows it holds CN¥1.53b in cash, so it actually has CN¥1.20b net cash.

How Healthy Is China SpacesatLtd's Balance Sheet?

According to the last reported balance sheet, China SpacesatLtd had liabilities of CN¥5.01b due within 12 months, and liabilities of CN¥432.3m due beyond 12 months. On the other hand, it had cash of CN¥1.53b and CN¥5.33b worth of receivables due within a year. So it actually has CN¥1.42b 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 balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China SpacesatLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, China SpacesatLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.9b, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is China SpacesatLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months China SpacesatLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥1.2b and booked a CN¥23m accounting loss. With only CN¥1.20b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for China SpacesatLtd 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.