Inmyshow Digital Technology(Group)Co.Ltd (SHSE:600556) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Inmyshow Digital Technology(Group)Co.,Ltd. (SHSE:600556) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Inmyshow Digital Technology(Group)Co.Ltd

How Much Debt Does Inmyshow Digital Technology(Group)Co.Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that Inmyshow Digital Technology(Group)Co.Ltd had CN¥493.0m of debt in September 2024, down from CN¥879.0m, one year before. But it also has CN¥1.60b in cash to offset that, meaning it has CN¥1.10b net cash.

How Healthy Is Inmyshow Digital Technology(Group)Co.Ltd's Balance Sheet?

The latest balance sheet data shows that Inmyshow Digital Technology(Group)Co.Ltd had liabilities of CN¥1.61b due within a year, and liabilities of CN¥42.9m falling due after that. On the other hand, it had cash of CN¥1.60b and CN¥2.62b worth of receivables due within a year. So it can boast CN¥2.56b more liquid assets than total liabilities.

This surplus suggests that Inmyshow Digital Technology(Group)Co.Ltd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Inmyshow Digital Technology(Group)Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Inmyshow Digital Technology(Group)Co.Ltd's load is not too heavy, because its EBIT was down 73% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Inmyshow Digital Technology(Group)Co.Ltd'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. Inmyshow Digital Technology(Group)Co.Ltd 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, Inmyshow Digital Technology(Group)Co.Ltd reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Inmyshow Digital Technology(Group)Co.Ltd has net cash of CN¥1.10b, as well as more liquid assets than liabilities. So we are not troubled with Inmyshow Digital Technology(Group)Co.Ltd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Inmyshow Digital Technology(Group)Co.Ltd (1 is a bit concerning) 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.

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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.