Is CETC Digital TechnologyLtd (SHSE:600850) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CETC Digital Technology Co.,Ltd. (SHSE:600850) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for CETC Digital TechnologyLtd

What Is CETC Digital TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that CETC Digital TechnologyLtd had debt of CN¥114.0m at the end of June 2024, a reduction from CN¥241.8m over a year. But on the other hand it also has CN¥847.0m in cash, leading to a CN¥733.0m net cash position.

How Healthy Is CETC Digital TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CETC Digital TechnologyLtd had liabilities of CN¥5.12b due within 12 months and liabilities of CN¥444.9m due beyond that. Offsetting these obligations, it had cash of CN¥847.0m as well as receivables valued at CN¥2.98b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.74b.

Of course, CETC Digital TechnologyLtd has a market capitalization of CN¥14.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, CETC Digital TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

CETC Digital TechnologyLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 CETC Digital TechnologyLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, CETC Digital TechnologyLtd reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While CETC Digital TechnologyLtd does have more liabilities than liquid assets, it also has net cash of CN¥733.0m. So we are not troubled with CETC Digital TechnologyLtd's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with CETC Digital TechnologyLtd .

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.