We Think China Satellite Communications (SHSE:601698) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, China Satellite Communications Co., Ltd. (SHSE:601698) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Satellite Communications

What Is China Satellite Communications's Debt?

As you can see below, at the end of September 2024, China Satellite Communications had CN¥27.0m of debt, up from CN¥12.0m a year ago. Click the image for more detail. But it also has CN¥6.13b in cash to offset that, meaning it has CN¥6.11b net cash.

How Strong Is China Satellite Communications' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Satellite Communications had liabilities of CN¥2.08b due within 12 months and liabilities of CN¥1.25b due beyond that. On the other hand, it had cash of CN¥6.13b and CN¥929.4m worth of receivables due within a year. So it can boast CN¥3.73b more liquid assets than total liabilities.

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

It is just as well that China Satellite Communications's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 China Satellite Communications 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. 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 19% 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 China Satellite Communications has net cash of CN¥6.11b, as well as more liquid assets than liabilities. So we don't have any problem with China Satellite Communications's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for China Satellite Communications you should be aware of.

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.