Is CCCC Design & Consulting Group (SHSE:600720) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies CCCC Design & Consulting Group Co., Ltd. (SHSE:600720) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt 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 June 2024 CCCC Design & Consulting Group had debt of CN¥1.36b, up from CN¥300.1m in one year. But it also has CN¥4.62b in cash to offset that, meaning it has CN¥3.26b net cash.

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

We can see from the most recent balance sheet that CCCC Design & Consulting Group had liabilities of CN¥11.2b falling due within a year, and liabilities of CN¥3.24b due beyond that. Offsetting these obligations, it had cash of CN¥4.62b as well as receivables valued at CN¥11.6b due within 12 months. So it can boast CN¥1.74b more liquid assets than total liabilities.

This surplus suggests that CCCC Design & Consulting Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CCCC Design & Consulting Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CCCC Design & Consulting Group has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, CCCC Design & Consulting Group recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case CCCC Design & Consulting Group has CN¥3.26b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 40% over the last year. So is CCCC Design & Consulting Group's debt a risk? It doesn't seem so to us. 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. We've identified 3 warning signs with CCCC Design & Consulting Group (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.