Here's Why China Marine Information Electronics (SHSE:600764) Can Manage Its Debt Responsibly

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.' 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. As with many other companies China Marine Information Electronics Company Limited (SHSE:600764) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 China Marine Information Electronics

What Is China Marine Information Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that China Marine Information Electronics had CN¥697.1m of debt in September 2024, down from CN¥781.9m, one year before. However, its balance sheet shows it holds CN¥2.32b in cash, so it actually has CN¥1.62b net cash.

How Strong Is China Marine Information Electronics' Balance Sheet?

According to the last reported balance sheet, China Marine Information Electronics had liabilities of CN¥2.95b due within 12 months, and liabilities of CN¥387.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.32b as well as receivables valued at CN¥4.88b due within 12 months. So it can boast CN¥3.86b more liquid assets than total liabilities.

This excess liquidity suggests that China Marine Information Electronics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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 22% in the last twelve months. 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 it is future earnings, more than anything, that will determine China Marine Information Electronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Marine Information Electronics 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. Looking at the most recent three years, China Marine Information Electronics recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Marine Information Electronics has CN¥1.62b in net cash and a decent-looking balance sheet. So we don't have any problem with China Marine Information Electronics's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in China Marine Information Electronics, you may well want to click here to check an interactive graph of its earnings per share history.

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.