INESA Intelligent Tech (SHSE:600602) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that INESA Intelligent Tech Inc. (SHSE:600602) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 INESA Intelligent Tech

How Much Debt Does INESA Intelligent Tech Carry?

As you can see below, INESA Intelligent Tech had CN¥148.4m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥3.25b in cash, so it actually has CN¥3.10b net cash.

How Strong Is INESA Intelligent Tech's Balance Sheet?

According to the last reported balance sheet, INESA Intelligent Tech had liabilities of CN¥1.92b due within 12 months, and liabilities of CN¥227.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.25b as well as receivables valued at CN¥1.07b due within 12 months. So it actually has CN¥2.17b more liquid assets than total liabilities.

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

In addition to that, we're happy to report that INESA Intelligent Tech has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. INESA Intelligent Tech 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, 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 it is always sensible to investigate a company's debt, in this case INESA Intelligent Tech has CN¥3.10b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥249m, being 127% of its EBIT. So we don't think INESA Intelligent Tech's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that INESA Intelligent Tech is showing 1 warning sign in our investment analysis , 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.