We Think Cosonic Intelligent Technologies (SZSE:300793) Is Taking Some Risk With 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Cosonic Intelligent Technologies Co., Ltd. (SZSE:300793) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 Cosonic Intelligent Technologies

What Is Cosonic Intelligent Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Cosonic Intelligent Technologies had debt of CN¥1.19b, up from CN¥289.1m in one year. But it also has CN¥1.94b in cash to offset that, meaning it has CN¥759.4m net cash.

A Look At Cosonic Intelligent Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Cosonic Intelligent Technologies had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥983.1m due beyond that. Offsetting this, it had CN¥1.94b in cash and CN¥771.7m in receivables that were due within 12 months. So it actually has CN¥581.1m more liquid assets than total liabilities.

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

In fact Cosonic Intelligent Technologies's saving grace is its low debt levels, because its EBIT has tanked 87% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Cosonic Intelligent Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cosonic Intelligent 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. During the last three years, Cosonic Intelligent Technologies burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cosonic Intelligent Technologies has net cash of CN¥759.4m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Cosonic Intelligent Technologies's balance sheet. 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. We've identified 4 warning signs with Cosonic Intelligent Technologies , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.