We Think Infore Environment Technology Group (SZSE:000967) Can Stay On Top Of Its 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 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. We can see that Infore Environment Technology Group Co., Ltd. (SZSE:000967) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

As you can see below, Infore Environment Technology Group had CN¥3.89b of debt at September 2023, down from CN¥4.36b a year prior. But it also has CN¥4.06b in cash to offset that, meaning it has CN¥176.3m net cash.

A Look At Infore Environment Technology Group's Liabilities

The latest balance sheet data shows that Infore Environment Technology Group had liabilities of CN¥7.72b due within a year, and liabilities of CN¥3.84b falling due after that. On the other hand, it had cash of CN¥4.06b and CN¥6.66b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥838.1m.

Since publicly traded Infore Environment Technology Group shares are worth a total of CN¥15.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Infore Environment Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Infore Environment Technology Group grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Infore Environment Technology Group can strengthen its balance sheet over time. 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. 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. In the last three years, Infore Environment Technology Group created free cash flow amounting to 7.0% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Infore Environment Technology Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥176.3m. On top of that, it increased its EBIT by 12% in the last twelve months. So we don't have any problem with Infore Environment Technology Group's use of debt. 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. Be aware that Infore Environment Technology Group is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.