Is Nanjing Canatal Data-Centre Environmental Tech (SHSE:603912) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Nanjing Canatal Data-Centre Environmental Tech

What Is Nanjing Canatal Data-Centre Environmental Tech's Net Debt?

As you can see below, at the end of September 2024, Nanjing Canatal Data-Centre Environmental Tech had CN¥993.7m of debt, up from CN¥841.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.74b in cash, so it actually has CN¥748.6m net cash.

How Healthy Is Nanjing Canatal Data-Centre Environmental Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nanjing Canatal Data-Centre Environmental Tech had liabilities of CN¥1.23b due within 12 months and liabilities of CN¥307.8m due beyond that. Offsetting this, it had CN¥1.74b in cash and CN¥397.1m in receivables that were due within 12 months. So it can boast CN¥599.0m more liquid assets than total liabilities.

This surplus suggests that Nanjing Canatal Data-Centre Environmental Tech is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Nanjing Canatal Data-Centre Environmental Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Nanjing Canatal Data-Centre Environmental Tech grew its EBIT by 794% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nanjing Canatal Data-Centre Environmental Tech 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Nanjing Canatal Data-Centre Environmental Tech 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, Nanjing Canatal Data-Centre Environmental Tech saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nanjing Canatal Data-Centre Environmental Tech has net cash of CN¥748.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 794% year-on-year EBIT growth. So is Nanjing Canatal Data-Centre Environmental Tech's debt a risk? It doesn't seem so to us. 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. We've identified 3 warning signs with Nanjing Canatal Data-Centre Environmental Tech (at least 2 which are significant) , and understanding them should be part of your investment process.

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.