INESA Intelligent Tech (SHSE:600602) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, INESA Intelligent Tech Inc. (SHSE:600602) does carry 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 INESA Intelligent Tech

How Much Debt Does INESA Intelligent Tech Carry?

You can click the graphic below for the historical numbers, but it shows that INESA Intelligent Tech had CN¥55.6m of debt in June 2024, down from CN¥146.6m, one year before. However, its balance sheet shows it holds CN¥3.29b in cash, so it actually has CN¥3.23b net cash.

A Look At INESA Intelligent Tech's Liabilities

The latest balance sheet data shows that INESA Intelligent Tech had liabilities of CN¥1.73b due within a year, and liabilities of CN¥137.2m falling due after that. Offsetting these obligations, it had cash of CN¥3.29b as well as receivables valued at CN¥979.7m due within 12 months. So it can boast CN¥2.40b more liquid assets than total liabilities.

This excess liquidity suggests that INESA Intelligent Tech is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, INESA Intelligent Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that INESA Intelligent Tech's load is not too heavy, because its EBIT was down 21% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine INESA Intelligent Tech'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While INESA Intelligent Tech 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. Over the last three years, INESA Intelligent Tech actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that INESA Intelligent Tech has net cash of CN¥3.23b, as well as more liquid assets than liabilities. The cherry on top was that in converted 172% of that EBIT to free cash flow, bringing in CN¥295m. So is INESA Intelligent Tech's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with INESA Intelligent Tech , and understanding them should be part of your investment process.

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.