Intco Recycling Resources (SHSE:688087) Seems To Use Debt Quite Sensibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Intco Recycling Resources Co., Ltd. (SHSE:688087) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Intco Recycling Resources

How Much Debt Does Intco Recycling Resources Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Intco Recycling Resources had debt of CN¥2.10b, up from CN¥1.00b in one year. But on the other hand it also has CN¥2.38b in cash, leading to a CN¥278.6m net cash position.

A Look At Intco Recycling Resources' Liabilities

The latest balance sheet data shows that Intco Recycling Resources had liabilities of CN¥2.41b due within a year, and liabilities of CN¥257.0m falling due after that. On the other hand, it had cash of CN¥2.38b and CN¥471.6m worth of receivables due within a year. So it can boast CN¥185.7m more liquid assets than total liabilities.

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

On top of that, Intco Recycling Resources grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Intco Recycling Resources'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. Intco Recycling Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Intco Recycling Resources saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Intco Recycling Resources has CN¥278.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 94% year-on-year EBIT growth. So we are not troubled with Intco Recycling Resources's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Intco Recycling Resources's earnings per share history for free.

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.