Digital China Information Service Group (SZSE:000555) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Digital China Information Service Group Company Ltd. (SZSE:000555) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Digital China Information Service Group

What Is Digital China Information Service Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Digital China Information Service Group had CN¥252.7m of debt, an increase on CN¥236.3m, over one year. But on the other hand it also has CN¥815.8m in cash, leading to a CN¥563.0m net cash position.

How Healthy 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¥5.30b due within 12 months and liabilities of CN¥100.2m due beyond that. Offsetting these obligations, it had cash of CN¥815.8m as well as receivables valued at CN¥5.48b due within 12 months. So it actually has CN¥889.5m more liquid assets than total liabilities.

This surplus suggests that Digital China Information Service Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Digital China Information Service Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Digital China Information Service Group grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 Digital China Information Service Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Digital China Information Service Group 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, Digital China Information Service Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Digital China Information Service Group has CN¥563.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 16% year-on-year EBIT growth. So we are not troubled with Digital China Information Service Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Digital China Information Service Group has 1 warning sign we think you should be aware of.

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.

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