Changchun High-Tech Industry (Group) (SZSE:000661) Seems To Use Debt Rather Sparingly

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.' 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 Changchun High-Tech Industry (Group) Co., Ltd. (SZSE:000661) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Changchun High-Tech Industry (Group)

What Is Changchun High-Tech Industry (Group)'s Debt?

The image below, which you can click on for greater detail, shows that Changchun High-Tech Industry (Group) had debt of CN¥941.5m at the end of March 2024, a reduction from CN¥1.33b over a year. But on the other hand it also has CN¥7.59b in cash, leading to a CN¥6.65b net cash position.

How Healthy Is Changchun High-Tech Industry (Group)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Changchun High-Tech Industry (Group) had liabilities of CN¥3.86b due within 12 months and liabilities of CN¥963.9m due beyond that. On the other hand, it had cash of CN¥7.59b and CN¥4.61b worth of receivables due within a year. So it actually has CN¥7.37b more liquid assets than total liabilities.

This excess liquidity suggests that Changchun High-Tech Industry (Group) is taking a careful approach to debt. 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 Changchun High-Tech Industry (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Changchun High-Tech Industry (Group) has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. 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 Changchun High-Tech Industry (Group) can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. While Changchun High-Tech Industry (Group) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Changchun High-Tech Industry (Group)'s free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changchun High-Tech Industry (Group) has net cash of CN¥6.65b, as well as more liquid assets than liabilities. And we liked the look of last year's 22% year-on-year EBIT growth. So is Changchun High-Tech Industry (Group)'s debt a risk? It doesn't seem so to us. Given Changchun High-Tech Industry (Group) has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.