Here's Why China World Trade Center (SHSE:600007) 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. As with many other companies China World Trade Center Co., Ltd. (SHSE:600007) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out 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¥1.09b of debt at September 2024, down from CN¥1.59b a year prior. But it also has CN¥3.68b in cash to offset that, meaning it has CN¥2.59b 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¥1.59b falling due within a year, 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 can boast CN¥1.23b more liquid assets than total liabilities.

This short term liquidity is a sign that China World Trade Center could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China World Trade Center 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. Over the last three years, China World Trade Center actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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¥2.59b, as well as more liquid assets than liabilities. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with China World Trade Center .

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.