We Think COFCO Technology & Industry (SZSE:301058) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies COFCO Technology & Industry Co., Ltd. (SZSE:301058) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for COFCO Technology & Industry

What Is COFCO Technology & Industry's Net Debt?

You can click the graphic below for the historical numbers, but it shows that COFCO Technology & Industry had CN¥46.9m of debt in September 2024, down from CN¥63.7m, one year before. However, its balance sheet shows it holds CN¥1.42b in cash, so it actually has CN¥1.37b net cash.

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¥1.94b falling due within a year, and liabilities of CN¥59.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.42b as well as receivables valued at CN¥1.23b due within 12 months. So it can boast CN¥645.4m more liquid assets than total liabilities.

This short term liquidity is a sign that COFCO Technology & Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Also good is that COFCO Technology & Industry grew its EBIT at 11% over the last year, further increasing its ability to manage 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While COFCO Technology & Industry has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, COFCO Technology & Industry generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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¥1.37b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥242m. So we don't think COFCO Technology & Industry'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for COFCO Technology & Industry you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.