COFCO Technology & Industry (SZSE:301058) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that COFCO Technology & Industry Co., Ltd. (SZSE:301058) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for COFCO Technology & Industry

What Is COFCO Technology & Industry's Debt?

The image below, which you can click on for greater detail, shows that COFCO Technology & Industry had debt of CN¥39.8m at the end of March 2024, a reduction from CN¥68.2m over a year. But on the other hand it also has CN¥1.51b in cash, leading to a CN¥1.47b net cash position.

How Strong Is COFCO Technology & Industry's Balance Sheet?

We can see from the most recent balance sheet that COFCO Technology & Industry had liabilities of CN¥1.74b falling due within a year, and liabilities of CN¥53.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.51b as well as receivables valued at CN¥1.10b due within 12 months. So it actually has CN¥812.6m more liquid assets than total liabilities.

This excess liquidity suggests that COFCO Technology & Industry is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that COFCO Technology & Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, COFCO Technology & Industry grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine COFCO Technology & Industry'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. COFCO Technology & Industry 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, COFCO Technology & Industry recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that COFCO Technology & Industry has net cash of CN¥1.47b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥403m, being 95% of its EBIT. So we don't think COFCO Technology & Industry's use of debt is risky. 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. For instance, we've identified 1 warning sign for COFCO Technology & Industry that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.