Here's Why Changchun High-Tech Industry (Group) (SZSE:000661) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Changchun High-Tech Industry (Group) Co., Ltd. (SZSE:000661) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

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

The chart below, which you can click on for greater detail, shows that Changchun High-Tech Industry (Group) had CN¥1.48b in debt in June 2024; about the same as the year before. But it also has CN¥6.57b in cash to offset that, meaning it has CN¥5.09b net cash.

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

According to the last reported balance sheet, Changchun High-Tech Industry (Group) had liabilities of CN¥3.44b due within 12 months, and liabilities of CN¥1.62b due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.57b as well as receivables valued at CN¥4.43b due within 12 months. So it can boast CN¥5.94b more liquid assets than total liabilities.

This short term liquidity is a sign that Changchun High-Tech Industry (Group) could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Fortunately, Changchun High-Tech Industry (Group) grew its EBIT by 6.0% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Changchun High-Tech Industry (Group)'s ability to maintain a healthy balance sheet going forward. 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. Changchun High-Tech Industry (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. Looking at the most recent three years, Changchun High-Tech Industry (Group) recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Changchun High-Tech Industry (Group) has CN¥5.09b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.0% over the last year. So we don't think Changchun High-Tech Industry (Group)'s use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Changchun High-Tech Industry (Group)'s dividend history, without delay!

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.