Is Asiainfo Security TechnologiesLtd (SHSE:688225) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Asiainfo Security Technologies Co.,Ltd. (SHSE:688225) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Asiainfo Security TechnologiesLtd

What Is Asiainfo Security TechnologiesLtd's Debt?

As you can see below, at the end of December 2023, Asiainfo Security TechnologiesLtd had CN¥244.8m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.16b in cash to offset that, meaning it has CN¥914.1m net cash.

How Healthy Is Asiainfo Security TechnologiesLtd's Balance Sheet?

According to the last reported balance sheet, Asiainfo Security TechnologiesLtd had liabilities of CN¥990.9m due within 12 months, and liabilities of CN¥280.3m due beyond 12 months. Offsetting this, it had CN¥1.16b in cash and CN¥1.05b in receivables that were due within 12 months. So it actually has CN¥934.6m more liquid assets than total liabilities.

It's good to see that Asiainfo Security TechnologiesLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Asiainfo Security TechnologiesLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Asiainfo Security TechnologiesLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Asiainfo Security TechnologiesLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 6.6%. We would much prefer see growth.

So How Risky Is Asiainfo Security TechnologiesLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Asiainfo Security TechnologiesLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥423m and booked a CN¥291m accounting loss. With only CN¥914.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Asiainfo Security TechnologiesLtd's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.