We Think Centre Testing International Group (SZSE:300012) Can Stay On Top Of Its Debt

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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Centre Testing International Group

What Is Centre Testing International Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Centre Testing International Group had CN¥119.5m of debt in September 2024, down from CN¥128.9m, one year before. However, it does have CN¥898.6m in cash offsetting this, leading to net cash of CN¥779.1m.

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 this, it had CN¥898.6m in cash and CN¥2.46b in receivables that were due within 12 months. So it can boast CN¥1.40b more liquid assets than total liabilities.

This surplus suggests that Centre Testing International Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

But the bad news is that Centre Testing International Group has seen its EBIT plunge 16% 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 future earnings, more than anything, that will determine Centre Testing International Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Centre Testing International Group 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. In the last three years, Centre Testing International Group's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Centre Testing International Group has net cash of CN¥779.1m, as well as more liquid assets than liabilities. So we don't have any problem with Centre Testing International Group's use of debt. 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.

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.