These 4 Measures Indicate That Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678) Is Using Debt Reasonably Well

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.' 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. Importantly, Chengdu Information Technology of Chinese Academy of Sciences Co.,Ltd (SZSE:300678) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chengdu Information Technology of Chinese Academy of SciencesLtd

What Is Chengdu Information Technology of Chinese Academy of SciencesLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Chengdu Information Technology of Chinese Academy of SciencesLtd had CN¥11.3m of debt, an increase on CN¥10.3m, over one year. However, it does have CN¥403.1m in cash offsetting this, leading to net cash of CN¥391.7m.

How Strong Is Chengdu Information Technology of Chinese Academy of SciencesLtd's Balance Sheet?

The latest balance sheet data shows that Chengdu Information Technology of Chinese Academy of SciencesLtd had liabilities of CN¥248.6m due within a year, and liabilities of CN¥5.67m falling due after that. Offsetting these obligations, it had cash of CN¥403.1m as well as receivables valued at CN¥316.3m due within 12 months. So it actually has CN¥465.1m more liquid assets than total liabilities.

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

It is just as well that Chengdu Information Technology of Chinese Academy of SciencesLtd's load is not too heavy, because its EBIT was down 61% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chengdu Information Technology of Chinese Academy of SciencesLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Chengdu Information Technology of Chinese Academy of SciencesLtd 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. Happily for any shareholders, Chengdu Information Technology of Chinese Academy of SciencesLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chengdu Information Technology of Chinese Academy of SciencesLtd has CN¥391.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 174% of that EBIT to free cash flow, bringing in CN¥29m. So we don't have any problem with Chengdu Information Technology of Chinese Academy of SciencesLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Chengdu Information Technology of Chinese Academy of SciencesLtd (including 2 which are concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.