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

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.' 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 note that China World Trade Center Co., Ltd. (SHSE:600007) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China World Trade Center

How Much Debt Does China World Trade Center Carry?

As you can see below, China World Trade Center had CN¥1.54b of debt at March 2024, down from CN¥2.10b a year prior. However, it does have CN¥4.55b in cash offsetting this, leading to net cash of CN¥3.01b.

A Look At China World Trade Center's Liabilities

The latest balance sheet data shows that China World Trade Center had liabilities of CN¥2.03b due within a year, and liabilities of CN¥1.12b falling due after that. Offsetting this, it had CN¥4.55b in cash and CN¥246.8m in receivables that were due within 12 months. So it actually has CN¥1.64b 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. Succinctly put, China World Trade Center boasts net cash, so it's fair to say it does not have a heavy debt load!

One way China World Trade Center could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 18%, as it did over the last year. 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'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. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case China World Trade Center has CN¥3.01b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 115% 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. Given China World Trade Center 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.

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