State Grid Information & Communication (SHSE:600131) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 State Grid Information & Communication Co., Ltd. (SHSE:600131) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for State Grid Information & Communication

How Much Debt Does State Grid Information & Communication Carry?

The chart below, which you can click on for greater detail, shows that State Grid Information & Communication had CN¥263.9m in debt in September 2024; about the same as the year before. But it also has CN¥2.22b in cash to offset that, meaning it has CN¥1.95b net cash.

How Healthy Is State Grid Information & Communication's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that State Grid Information & Communication had liabilities of CN¥5.87b due within 12 months and liabilities of CN¥221.1m due beyond that. On the other hand, it had cash of CN¥2.22b and CN¥6.31b worth of receivables due within a year. So it actually has CN¥2.44b more liquid assets than total liabilities.

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

Also good is that State Grid Information & Communication grew its EBIT at 16% over the last year, further increasing its ability to manage 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 State Grid Information & Communication 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While State Grid Information & Communication 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, State Grid Information & Communication generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that State Grid Information & Communication has net cash of CN¥1.95b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥970m, being 87% of its EBIT. So we don't think State Grid Information & Communication's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in State Grid Information & Communication, you may well want to click here to check an interactive graph of its earnings per share history.

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.