Does Richinfo Technology (SZSE:300634) Have A Healthy Balance Sheet?

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.' 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 can see that Richinfo Technology Co., Ltd. (SZSE:300634) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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 Richinfo Technology

What Is Richinfo Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Richinfo Technology had CN¥114.9m of debt, an increase on CN¥60.0m, over one year. However, it does have CN¥1.12b in cash offsetting this, leading to net cash of CN¥1.01b.

How Healthy Is Richinfo Technology's Balance Sheet?

According to the last reported balance sheet, Richinfo Technology had liabilities of CN¥642.1m due within 12 months, and liabilities of CN¥14.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.12b as well as receivables valued at CN¥956.9m due within 12 months. So it actually has CN¥1.42b more liquid assets than total liabilities.

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

But the bad news is that Richinfo Technology has seen its EBIT plunge 13% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Richinfo Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Richinfo Technology 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. In the last three years, Richinfo Technology's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Richinfo Technology has net cash of CN¥1.01b, as well as more liquid assets than liabilities. So we don't have any problem with Richinfo Technology'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 2 warning signs with Richinfo Technology (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.