China World Trade Center (SHSE:600007) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, China World Trade Center Co., Ltd. (SHSE:600007) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China World Trade Center

How Much Debt Does China World Trade Center Carry?

You can click the graphic below for the historical numbers, but it shows that China World Trade Center had CN¥1.59b of debt in September 2023, down from CN¥2.09b, one year before. However, its balance sheet shows it holds CN¥3.79b in cash, so it actually has CN¥2.20b net cash.

A Look At China World Trade Center's Liabilities

We can see from the most recent balance sheet that China World Trade Center had liabilities of CN¥2.09b falling due within a year, and liabilities of CN¥1.18b due beyond that. Offsetting these obligations, it had cash of CN¥3.79b as well as receivables valued at CN¥300.2m due within 12 months. So it can boast CN¥830.5m more liquid assets than total liabilities.

This surplus suggests that China World Trade Center has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China World Trade Center has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that China World Trade Center grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China World Trade Center 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China World Trade Center 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. Over the last three years, China World Trade Center actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China World Trade Center has net cash of CN¥2.20b, as well as more liquid assets than liabilities. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in CN¥1.8b. So we don't think China World Trade Center's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check China World Trade Center's dividend history, without delay!

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.