State Grid Information & Communication (SHSE:600131) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 State Grid Information & Communication Co., Ltd. (SHSE:600131) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for State Grid Information & Communication

How Much Debt Does State Grid Information & Communication Carry?

The image below, which you can click on for greater detail, shows that at March 2024 State Grid Information & Communication had debt of CN¥319.2m, up from CN¥100.0m in one year. However, its balance sheet shows it holds CN¥2.56b in cash, so it actually has CN¥2.24b net cash.

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

The latest balance sheet data shows that State Grid Information & Communication had liabilities of CN¥6.58b due within a year, and liabilities of CN¥103.7m falling due after that. On the other hand, it had cash of CN¥2.56b and CN¥7.09b worth of receivables due within a year. So it actually has CN¥2.97b more liquid assets than total liabilities.

This short term liquidity is a sign that State Grid Information & Communication could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, State Grid Information & Communication boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, State Grid Information & Communication saw its EBIT drop by 9.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 86% 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¥2.24b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.0b, being 86% of its EBIT. So we don't think State Grid Information & Communication'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. Be aware that State Grid Information & Communication is showing 1 warning sign in our investment analysis , you should know about...

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