Is Inner Mongolia OJing Science & Technology (SZSE:001269) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Inner Mongolia OJing Science & Technology Co., Ltd. (SZSE:001269) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Inner Mongolia OJing Science & Technology

How Much Debt Does Inner Mongolia OJing Science & Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Inner Mongolia OJing Science & Technology had debt of CN¥676.1m, up from CN¥96.7m in one year. But it also has CN¥763.6m in cash to offset that, meaning it has CN¥87.5m net cash.

How Strong Is Inner Mongolia OJing Science & Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inner Mongolia OJing Science & Technology had liabilities of CN¥1.19b due within 12 months and liabilities of CN¥487.7m due beyond that. On the other hand, it had cash of CN¥763.6m and CN¥1.15b worth of receivables due within a year. So it can boast CN¥229.1m more liquid assets than total liabilities.

This surplus suggests that Inner Mongolia OJing Science & Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Inner Mongolia OJing Science & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Inner Mongolia OJing Science & Technology grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Inner Mongolia OJing Science & Technology'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. While Inner Mongolia OJing Science & Technology 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. During the last three years, Inner Mongolia OJing Science & Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Inner Mongolia OJing Science & Technology has net cash of CN¥87.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 40% over the last year. So we are not troubled with Inner Mongolia OJing Science & Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Inner Mongolia OJing Science & Technology (of which 1 makes us a bit uncomfortable!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.