These 4 Measures Indicate That China Satellite Communications (SHSE:601698) Is Using Debt Reasonably Well

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. We note that China Satellite Communications Co., Ltd. (SHSE:601698) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Satellite Communications

How Much Debt Does China Satellite Communications Carry?

The image below, which you can click on for greater detail, shows that China Satellite Communications had debt of CN¥17.0m at the end of June 2024, a reduction from CN¥25.0m over a year. But on the other hand it also has CN¥7.62b in cash, leading to a CN¥7.61b net cash position.

How Healthy Is China Satellite Communications' Balance Sheet?

According to the last reported balance sheet, China Satellite Communications had liabilities of CN¥2.00b due within 12 months, and liabilities of CN¥1.27b due beyond 12 months. On the other hand, it had cash of CN¥7.62b and CN¥927.7m worth of receivables due within a year. So it actually has CN¥5.29b more liquid assets than total liabilities.

This short term liquidity is a sign that China Satellite Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Satellite Communications has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, China Satellite Communications's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Satellite Communications will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Satellite Communications 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, China Satellite Communications reported free cash flow worth 13% 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 it is always sensible to investigate a company's debt, in this case China Satellite Communications has CN¥7.61b in net cash and a decent-looking balance sheet. So we don't have any problem with China Satellite Communications's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with China Satellite Communications , and understanding them should be part of your investment process.

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.