37 Interactive Entertainment Network Technology Group (SZSE:002555) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies 37 Interactive Entertainment Network Technology Group Co., Ltd. (SZSE:002555) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for 37 Interactive Entertainment Network Technology Group

What Is 37 Interactive Entertainment Network Technology Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that 37 Interactive Entertainment Network Technology Group had CN¥1.92b of debt in June 2024, down from CN¥2.46b, one year before. But on the other hand it also has CN¥7.63b in cash, leading to a CN¥5.71b net cash position.

A Look At 37 Interactive Entertainment Network Technology Group's Liabilities

The latest balance sheet data shows that 37 Interactive Entertainment Network Technology Group had liabilities of CN¥6.38b due within a year, and liabilities of CN¥192.5m falling due after that. On the other hand, it had cash of CN¥7.63b and CN¥1.33b worth of receivables due within a year. So it actually has CN¥2.38b more liquid assets than total liabilities.

This surplus suggests that 37 Interactive Entertainment Network Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 37 Interactive Entertainment Network Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that 37 Interactive Entertainment Network Technology Group has increased its EBIT by 8.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine 37 Interactive Entertainment Network Technology Group'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. 37 Interactive Entertainment Network Technology Group 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, 37 Interactive Entertainment Network Technology Group recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case 37 Interactive Entertainment Network Technology Group has CN¥5.71b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in CN¥1.4b. So we don't think 37 Interactive Entertainment Network Technology Group's use of debt is risky. 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. Be aware that 37 Interactive Entertainment Network Technology Group is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.