We Think China Marine Information Electronics (SHSE:600764) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, China Marine Information Electronics Company Limited (SHSE:600764) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for China Marine Information Electronics

What Is China Marine Information Electronics's Debt?

The image below, which you can click on for greater detail, shows that China Marine Information Electronics had debt of CN¥697.1m at the end of September 2024, a reduction from CN¥781.9m over a year. But on the other hand it also has CN¥2.32b in cash, leading to a CN¥1.62b net cash position.

How Healthy Is China Marine Information Electronics' Balance Sheet?

We can see from the most recent balance sheet that China Marine Information Electronics had liabilities of CN¥2.95b falling due within a year, and liabilities of CN¥387.2m due beyond that. 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.

It is just as well that China Marine Information Electronics's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Marine Information Electronics'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. 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. In the last three years, China Marine Information Electronics's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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¥1.62b, as well as more liquid assets than liabilities. So we are not troubled with China Marine Information Electronics's debt use. 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.

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.