Infore Environment Technology Group (SZSE:000967) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Infore Environment Technology Group Co., Ltd. (SZSE:000967) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Infore Environment Technology Group

What Is Infore Environment Technology Group's Debt?

As you can see below, Infore Environment Technology Group had CN¥3.76b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥4.29b in cash offsetting this, leading to net cash of CN¥535.1m.

How Strong Is Infore Environment Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Infore Environment Technology Group had liabilities of CN¥6.96b due within 12 months and liabilities of CN¥3.99b due beyond that. Offsetting these obligations, it had cash of CN¥4.29b as well as receivables valued at CN¥6.97b due within 12 months. So it actually has CN¥308.3m more liquid assets than total liabilities.

This state of affairs indicates that Infore Environment Technology Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥16.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Infore Environment Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Infore Environment Technology Group saw its EBIT drop by 8.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Infore Environment Technology Group'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. Infore Environment Technology Group 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. During the last three years, Infore Environment Technology Group produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Infore Environment Technology Group has net cash of CN¥535.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in CN¥63m. So we don't think Infore Environment Technology Group's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Infore Environment Technology Group you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.