Here's Why China World Trade Center (SHSE:600007) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that China World Trade Center Co., Ltd. (SHSE:600007) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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?

The image below, which you can click on for greater detail, shows that China World Trade Center had debt of CN¥1.09b at the end of September 2024, a reduction from CN¥1.59b over a year. However, its balance sheet shows it holds CN¥3.68b in cash, so it actually has CN¥2.59b net cash.

A Look At China World Trade Center's Liabilities

Zooming in on the latest balance sheet data, we can see that China World Trade Center had liabilities of CN¥1.59b due within 12 months and liabilities of CN¥1.12b due beyond that. Offsetting this, it had CN¥3.68b in cash and CN¥255.4m in receivables that were due within 12 months. So it actually has CN¥1.23b 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!

China World Trade Center grew its EBIT by 4.0% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. 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, 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. Happily for any shareholders, China World Trade Center actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case China World Trade Center has CN¥2.59b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.7b, being 111% of its EBIT. So we don't think China World Trade Center's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - China World Trade Center has 1 warning sign we think you should be aware of.

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.

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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.