These 4 Measures Indicate That Changchun High-Tech Industry (Group) (SZSE:000661) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Changchun High-Tech Industry (Group) Co., Ltd. (SZSE:000661) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that Changchun High-Tech Industry (Group) had CN¥1.39b of debt in September 2024, down from CN¥1.46b, one year before. But on the other hand it also has CN¥6.47b in cash, leading to a CN¥5.08b net cash position.

A Look At Changchun High-Tech Industry (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Changchun High-Tech Industry (Group) had liabilities of CN¥3.44b due within 12 months and liabilities of CN¥1.62b due beyond that. On the other hand, it had cash of CN¥6.47b and CN¥4.75b worth of receivables due within a year. So it actually has CN¥6.16b more liquid assets than total liabilities.

This excess liquidity suggests that Changchun High-Tech Industry (Group) is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Changchun High-Tech Industry (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Changchun High-Tech Industry (Group) saw its EBIT drop by 8.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Changchun High-Tech Industry (Group)'s free cash flow amounted to 42% of its EBIT, less 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¥5.08b in net cash and a decent-looking balance sheet. So we don't have any problem with Changchun High-Tech Industry (Group)'s use of debt. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.