Does China Marine Information Electronics (SHSE:600764) Have A Healthy Balance Sheet?

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.' 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. We can see that China Marine Information Electronics Company Limited (SHSE:600764) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

View our latest analysis for China Marine Information Electronics

How Much Debt Does China Marine Information Electronics Carry?

The image below, which you can click on for greater detail, shows that at September 2023 China Marine Information Electronics had debt of CN¥781.9m, up from CN¥582.5m in one year. But on the other hand it also has CN¥2.57b in cash, leading to a CN¥1.79b net cash position.

A Look At China Marine Information Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that China Marine Information Electronics had liabilities of CN¥2.78b due within 12 months and liabilities of CN¥540.5m due beyond that. Offsetting these obligations, it had cash of CN¥2.57b as well as receivables valued at CN¥4.46b due within 12 months. So it actually has CN¥3.71b more liquid assets than total liabilities.

This excess liquidity suggests that China Marine Information Electronics is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that China Marine Information Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact China Marine Information Electronics's saving grace is its low debt levels, because its EBIT has tanked 29% in the last twelve months. 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 ultimately the future profitability of the business will decide if China Marine Information Electronics can strengthen its balance sheet over time. 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. While China Marine Information Electronics 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 most recent three years, China Marine Information Electronics recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Marine Information Electronics has net cash of CN¥1.79b, as well as more liquid assets than liabilities. So we don't have any problem with China Marine Information Electronics'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 example, we've discovered 1 warning sign for China Marine Information Electronics that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.