Is INESA Intelligent Tech (SHSE:600602) A Risky Investment?

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 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for INESA Intelligent Tech

What Is INESA Intelligent Tech's Net Debt?

The image below, which you can click on for greater detail, shows that INESA Intelligent Tech had debt of CN¥143.6m at the end of September 2023, a reduction from CN¥159.9m over a year. However, its balance sheet shows it holds CN¥3.36b in cash, so it actually has CN¥3.22b net cash.

How Healthy Is INESA Intelligent Tech's Balance Sheet?

We can see from the most recent balance sheet that INESA Intelligent Tech had liabilities of CN¥1.82b falling due within a year, and liabilities of CN¥249.8m due beyond that. Offsetting this, it had CN¥3.36b in cash and CN¥1.34b in receivables that were due within 12 months. So it can boast CN¥2.63b more liquid assets than total liabilities.

This excess liquidity suggests that INESA Intelligent Tech is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that INESA Intelligent Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

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. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if INESA Intelligent Tech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 saw substantial negative free cash flow, in total. 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 INESA Intelligent Tech has net cash of CN¥3.22b, as well as more liquid assets than liabilities. So we are not troubled with INESA Intelligent Tech's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for INESA Intelligent Tech that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.