Here's Why KSEC Intelligent Technology (SZSE:301311) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies KSEC Intelligent Technology Co., Ltd. (SZSE:301311) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KSEC Intelligent Technology

How Much Debt Does KSEC Intelligent Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 KSEC Intelligent Technology had debt of CN¥450.0m, up from CN¥310.3m in one year. But it also has CN¥754.4m in cash to offset that, meaning it has CN¥304.4m net cash.

How Strong Is KSEC Intelligent Technology's Balance Sheet?

We can see from the most recent balance sheet that KSEC Intelligent Technology had liabilities of CN¥2.09b falling due within a year, and liabilities of CN¥526.2m due beyond that. Offsetting these obligations, it had cash of CN¥754.4m as well as receivables valued at CN¥1.56b due within 12 months. So its liabilities total CN¥303.9m more than the combination of its cash and short-term receivables.

Since publicly traded KSEC Intelligent Technology shares are worth a total of CN¥4.11b, 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. Despite its noteworthy liabilities, KSEC Intelligent Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

While KSEC Intelligent Technology doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is KSEC Intelligent Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. KSEC Intelligent 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. Over the last three years, KSEC Intelligent Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that KSEC Intelligent Technology has CN¥304.4m in net cash. So we are not troubled with KSEC Intelligent Technology's debt use. 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 KSEC Intelligent Technology is showing 1 warning sign 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.

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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.

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