Nanjing Canatal Data-Centre Environmental Tech (SHSE:603912) Seems To Use Debt Quite Sensibly

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. As with many other companies Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, 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 Nanjing Canatal Data-Centre Environmental Tech

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

The image below, which you can click on for greater detail, shows that at September 2024 Nanjing Canatal Data-Centre Environmental Tech had debt of CN¥993.7m, up from CN¥841.0m in one year. 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 these obligations, it had cash of CN¥1.74b as well as receivables valued at CN¥397.1m due within 12 months. So it actually has CN¥599.0m more liquid assets than total liabilities.

This surplus suggests that Nanjing Canatal Data-Centre Environmental Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanjing Canatal Data-Centre Environmental Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Nanjing Canatal Data-Centre Environmental Tech grew its EBIT by 794% over twelve months. That boost will make it even easier to pay down debt going forward. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 it is always sensible to investigate a company's debt, in this case Nanjing Canatal Data-Centre Environmental Tech has CN¥748.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 794% year-on-year EBIT growth. So we are not troubled with Nanjing Canatal Data-Centre Environmental Tech's debt use. 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. For example, we've discovered 4 warning signs for Nanjing Canatal Data-Centre Environmental Tech (2 are a bit unpleasant!) 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.