We Think Inmyshow Digital Technology(Group)Co.Ltd (SHSE:600556) Can Stay On Top Of 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. We note that Inmyshow Digital Technology(Group)Co.,Ltd. (SHSE:600556) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider 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?

As you can see below, at the end of September 2023, Inmyshow Digital Technology(Group)Co.Ltd had CN¥879.0m of debt, up from CN¥369.2m a year ago. Click the image for more detail. But it also has CN¥1.91b in cash to offset that, meaning it has CN¥1.03b net cash.

A Look At Inmyshow Digital Technology(Group)Co.Ltd's Liabilities

The latest balance sheet data shows that Inmyshow Digital Technology(Group)Co.Ltd had liabilities of CN¥1.90b due within a year, and liabilities of CN¥36.9m falling due after that. Offsetting this, it had CN¥1.91b in cash and CN¥2.70b in receivables that were due within 12 months. So it actually has CN¥2.67b more liquid assets than total liabilities.

This excess liquidity suggests that Inmyshow Digital Technology(Group)Co.Ltd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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 30% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Inmyshow Digital Technology(Group)Co.Ltd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, Inmyshow Digital Technology(Group)Co.Ltd burned a lot of cash. 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 Inmyshow Digital Technology(Group)Co.Ltd has CN¥1.03b in net cash and a decent-looking balance sheet. So we are not troubled with Inmyshow Digital Technology(Group)Co.Ltd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Inmyshow Digital Technology(Group)Co.Ltd you should know about.

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.