Is Keeson Technology (SHSE:603610) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Keeson Technology Corporation Limited (SHSE:603610) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Keeson Technology

What Is Keeson Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Keeson Technology had CN¥676.6m of debt, an increase on CN¥597.5m, over one year. But it also has CN¥1.06b in cash to offset that, meaning it has CN¥382.9m net cash.

A Look At Keeson Technology's Liabilities

According to the last reported balance sheet, Keeson Technology had liabilities of CN¥1.05b due within 12 months, and liabilities of CN¥544.3m due beyond 12 months. Offsetting this, it had CN¥1.06b in cash and CN¥573.1m in receivables that were due within 12 months. So it actually has CN¥34.3m more liquid assets than total liabilities.

This state of affairs indicates that Keeson Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥3.73b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Keeson Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Keeson Technology grew its EBIT by 128% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Keeson Technology 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 Keeson 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 most recent three years, Keeson Technology recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Keeson Technology has net cash of CN¥382.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 128% year-on-year EBIT growth. So is Keeson Technology's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Keeson Technology you should be aware of, and 1 of them can't be ignored.

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.