These 4 Measures Indicate That East China Engineering Science and Technology (SZSE:002140) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, East China Engineering Science and Technology Co., Ltd. (SZSE:002140) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 East China Engineering Science and Technology

What Is East China Engineering Science and Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 East China Engineering Science and Technology had CN¥1.69b of debt, an increase on CN¥1.32b, over one year. But on the other hand it also has CN¥3.29b in cash, leading to a CN¥1.60b net cash position.

A Look At East China Engineering Science and Technology's Liabilities

We can see from the most recent balance sheet that East China Engineering Science and Technology had liabilities of CN¥9.87b falling due within a year, and liabilities of CN¥1.52b due beyond that. Offsetting this, it had CN¥3.29b in cash and CN¥4.60b in receivables that were due within 12 months. So its liabilities total CN¥3.51b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since East China Engineering Science and Technology has a market capitalization of CN¥5.91b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, East China Engineering Science and Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

East China Engineering Science and Technology's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine East China Engineering Science and Technology'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. East China Engineering Science and Technology 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. Looking at the most recent three years, East China Engineering Science and Technology recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While East China Engineering Science and Technology does have more liabilities than liquid assets, it also has net cash of CN¥1.60b. So we don't have any problem with East China Engineering Science and Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - East China Engineering Science and Technology has 1 warning sign we think you should be aware of.

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.