These 4 Measures Indicate That CCCC Design & Consulting Group (SHSE:600720) Is Using Debt Reasonably Well

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CCCC Design & Consulting Group Co., Ltd. (SHSE:600720) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CCCC Design & Consulting Group

What Is CCCC Design & Consulting Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CCCC Design & Consulting Group had CN¥1.09b of debt, an increase on CN¥300.0m, over one year. However, its balance sheet shows it holds CN¥6.22b in cash, so it actually has CN¥5.14b net cash.

How Healthy Is CCCC Design & Consulting Group's Balance Sheet?

According to the last reported balance sheet, CCCC Design & Consulting Group had liabilities of CN¥10.5b due within 12 months, and liabilities of CN¥3.24b due beyond 12 months. Offsetting this, it had CN¥6.22b in cash and CN¥11.3b in receivables that were due within 12 months. So it can boast CN¥3.81b more liquid assets than total liabilities.

It's good to see that CCCC Design & Consulting Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, CCCC Design & Consulting Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that CCCC Design & Consulting Group grew its EBIT by 10% last year, making its debt load easier to handle. 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 CCCC Design & Consulting Group'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. CCCC Design & Consulting Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, CCCC Design & Consulting Group recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case CCCC Design & Consulting Group has CN¥5.14b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 10% in the last twelve months. So we don't have any problem with CCCC Design & Consulting Group's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with CCCC Design & Consulting Group (including 1 which is potentially serious) .

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.