CETC Digital TechnologyLtd (SHSE:600850) Has A Rock Solid 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that CETC Digital Technology Co.,Ltd. (SHSE:600850) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CETC Digital TechnologyLtd

What Is CETC Digital TechnologyLtd's Debt?

As you can see below, at the end of September 2023, CETC Digital TechnologyLtd had CN¥569.0m of debt, up from CN¥150.3m a year ago. Click the image for more detail. But it also has CN¥1.50b in cash to offset that, meaning it has CN¥930.7m net cash.

How Strong Is CETC Digital TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that CETC Digital TechnologyLtd had liabilities of CN¥5.34b falling due within a year, and liabilities of CN¥365.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.50b as well as receivables valued at CN¥2.97b due within 12 months. So it has liabilities totalling CN¥1.24b more than its cash and near-term receivables, combined.

Since publicly traded CETC Digital TechnologyLtd shares are worth a total of CN¥13.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, CETC Digital TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, CETC Digital TechnologyLtd grew its EBIT by 3.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CETC Digital TechnologyLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CETC Digital TechnologyLtd 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, CETC Digital TechnologyLtd generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that CETC Digital TechnologyLtd has CN¥930.7m in net cash. And it impressed us with free cash flow of CN¥723m, being 98% of its EBIT. So is CETC Digital TechnologyLtd'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 CETC Digital TechnologyLtd , and understanding them should be part of your investment process.

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.