We Think CETC Digital TechnologyLtd (SHSE:600850) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 CETC Digital TechnologyLtd

What Is CETC Digital TechnologyLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that CETC Digital TechnologyLtd had CN¥245.6m in debt in September 2024; about the same as the year before. But it also has CN¥1.06b in cash to offset that, meaning it has CN¥812.4m net cash.

A Look At CETC Digital TechnologyLtd's Liabilities

We can see from the most recent balance sheet that CETC Digital TechnologyLtd had liabilities of CN¥5.22b falling due within a year, and liabilities of CN¥485.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.06b as well as receivables valued at CN¥3.07b due within 12 months. So it has liabilities totalling CN¥1.58b more than its cash and near-term receivables, combined.

Given CETC Digital TechnologyLtd has a market capitalization of CN¥15.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CETC Digital TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

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. The balance sheet is clearly the area to focus on when you are analysing debt. 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. CETC Digital TechnologyLtd 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. In the last three years, CETC Digital TechnologyLtd created free cash flow amounting to 10% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

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¥812.4m in net cash. So we don't have any problem with CETC Digital TechnologyLtd's use of debt. 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. We've identified 1 warning sign with CETC Digital TechnologyLtd , and understanding them should be part of your investment process.

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.