Centre Testing International Group (SZSE:300012) Has A Rock Solid Balance Sheet

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.' 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 Centre Testing International Group Co. Ltd. (SZSE:300012) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Centre Testing International Group

What Is Centre Testing International Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Centre Testing International Group had CN¥367.4m of debt, an increase on CN¥18.6m, over one year. But it also has CN¥898.6m in cash to offset that, meaning it has CN¥531.1m net cash.

A Look At Centre Testing International Group's Liabilities

The latest balance sheet data shows that Centre Testing International Group had liabilities of CN¥1.45b due within a year, and liabilities of CN¥505.9m falling due after that. Offsetting these obligations, it had cash of CN¥898.6m as well as receivables valued at CN¥2.46b due within 12 months. So it can boast CN¥1.40b more liquid assets than total liabilities.

This short term liquidity is a sign that Centre Testing International Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Centre Testing International Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Centre Testing International Group has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Centre Testing International Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Centre Testing International Group 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. Looking at the most recent three years, Centre Testing International Group recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Centre Testing International Group has CN¥531.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 25% year-on-year EBIT growth. So is Centre Testing International Group's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Centre Testing International Group's earnings per share history for free.

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.