KSEC Intelligent Technology (SZSE:301311) Has A Somewhat Strained Balance Sheet

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. We note that KSEC Intelligent Technology Co., Ltd. (SZSE:301311) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KSEC Intelligent Technology

What Is KSEC Intelligent Technology's Net Debt?

As you can see below, at the end of June 2024, KSEC Intelligent Technology had CN¥450.3m of debt, up from CN¥300.2m a year ago. Click the image for more detail. But it also has CN¥650.6m in cash to offset that, meaning it has CN¥200.2m net cash.

How Healthy Is KSEC Intelligent Technology's Balance Sheet?

According to the last reported balance sheet, KSEC Intelligent Technology had liabilities of CN¥2.22b due within 12 months, and liabilities of CN¥524.2m due beyond 12 months. On the other hand, it had cash of CN¥650.6m and CN¥1.63b worth of receivables due within a year. So its liabilities total CN¥466.9m more than the combination of its cash and short-term receivables.

Given KSEC Intelligent Technology has a market capitalization of CN¥5.04b, it's hard to believe these liabilities pose much 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!

But the bad news is that KSEC Intelligent Technology has seen its EBIT plunge 15% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is KSEC Intelligent Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While KSEC Intelligent Technology 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. 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¥200.2m in net cash. So although we see some areas for improvement, we're not too worried about KSEC Intelligent Technology's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for KSEC Intelligent Technology (2 don't sit too well with us!) that you should be aware of before investing here.

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.