CCCC Design & Consulting Group (SHSE:600720) Has A Pretty Healthy Balance Sheet

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.' 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, CCCC Design & Consulting Group Co., Ltd. (SHSE:600720) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CCCC Design & Consulting Group

What Is CCCC Design & Consulting Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 CCCC Design & Consulting Group had debt of CN¥1.09b, up from CN¥201.3m in one year. But on the other hand it also has CN¥5.33b in cash, leading to a CN¥4.24b net cash position.

How Healthy Is CCCC Design & Consulting Group's Balance Sheet?

According to the last reported balance sheet, CCCC Design & Consulting Group had liabilities of CN¥10.9b due within 12 months, and liabilities of CN¥3.12b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.33b as well as receivables valued at CN¥10.7b due within 12 months. So it can boast CN¥1.98b more liquid assets than total liabilities.

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

And we also note warmly that CCCC Design & Consulting Group grew its EBIT by 13% last year, making its debt load easier to handle. 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 CCCC Design & Consulting Group'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While CCCC Design & Consulting 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. In the last three years, CCCC Design & Consulting Group created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CCCC Design & Consulting Group has net cash of CN¥4.24b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with CCCC Design & Consulting Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for CCCC Design & Consulting Group (2 are a bit unpleasant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.