Is Xiamen Intretech (SZSE:002925) Using Too Much 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.' 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 Xiamen Intretech Inc. (SZSE:002925) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Xiamen Intretech

How Much Debt Does Xiamen Intretech Carry?

The image below, which you can click on for greater detail, shows that Xiamen Intretech had debt of CN¥893.0m at the end of March 2024, a reduction from CN¥987.1m over a year. However, its balance sheet shows it holds CN¥2.01b in cash, so it actually has CN¥1.11b net cash.

A Look At Xiamen Intretech's Liabilities

The latest balance sheet data shows that Xiamen Intretech had liabilities of CN¥1.55b due within a year, and liabilities of CN¥439.4m falling due after that. On the other hand, it had cash of CN¥2.01b and CN¥1.18b worth of receivables due within a year. So it can boast CN¥1.20b more liquid assets than total liabilities.

This short term liquidity is a sign that Xiamen Intretech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xiamen Intretech boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Xiamen Intretech's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Xiamen Intretech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Xiamen Intretech 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. During the last three years, Xiamen Intretech produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xiamen Intretech has CN¥1.11b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in CN¥208m. So we are not troubled with Xiamen Intretech's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Xiamen Intretech 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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