Digital China Information Service Group (SZSE:000555) Could Easily Take On More Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Digital China Information Service Group Company Ltd. (SZSE:000555) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Digital China Information Service Group

What Is Digital China Information Service Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Digital China Information Service Group had CN¥155.2m of debt in December 2023, down from CN¥254.5m, one year before. However, it does have CN¥2.38b in cash offsetting this, leading to net cash of CN¥2.22b.

How Strong Is Digital China Information Service Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Digital China Information Service Group had liabilities of CN¥6.38b due within 12 months and liabilities of CN¥103.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.38b as well as receivables valued at CN¥5.47b due within 12 months. So it actually has CN¥1.37b more liquid assets than total liabilities.

This short term liquidity is a sign that Digital China Information Service Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Digital China Information Service Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Digital China Information Service Group grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its 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 Digital China Information Service Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Digital China Information Service Group 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. During the last three years, Digital China Information Service Group produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Digital China Information Service Group has net cash of CN¥2.22b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% over the last year. So we don't think Digital China Information Service Group's use of debt is risky. 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. Be aware that Digital China Information Service Group is showing 1 warning sign in our investment analysis , you should know about...

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.