We Think CIMC Safeway Technologies (SZSE:301559) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that CIMC Safeway Technologies Co., Ltd. (SZSE:301559) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for CIMC Safeway Technologies

How Much Debt Does CIMC Safeway Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 CIMC Safeway Technologies had CN¥45.2m of debt, an increase on CN¥37.7m, over one year. But on the other hand it also has CN¥2.94b in cash, leading to a CN¥2.90b net cash position.

How Strong Is CIMC Safeway Technologies' Balance Sheet?

According to the last reported balance sheet, CIMC Safeway Technologies had liabilities of CN¥697.2m due within 12 months, and liabilities of CN¥123.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.94b as well as receivables valued at CN¥388.2m due within 12 months. So it can boast CN¥2.51b more liquid assets than total liabilities.

This excess liquidity suggests that CIMC Safeway Technologies 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. Succinctly put, CIMC Safeway Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that CIMC Safeway Technologies's load is not too heavy, because its EBIT was down 50% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CIMC Safeway Technologies can strengthen its balance sheet over time. 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. While CIMC Safeway Technologies 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, CIMC Safeway Technologies recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually 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 CIMC Safeway Technologies has net cash of CN¥2.90b, as well as more liquid assets than liabilities. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in CN¥592m. So is CIMC Safeway Technologies's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CIMC Safeway Technologies 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.

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