We Think Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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 Chengdu Information Technology of Chinese Academy of Sciences Co.,Ltd (SZSE:300678) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

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

How Much Debt Does Chengdu Information Technology of Chinese Academy of SciencesLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Chengdu Information Technology of Chinese Academy of SciencesLtd had CN¥11.3m of debt, an increase on CN¥320.0k, over one year. But on the other hand it also has CN¥400.5m in cash, leading to a CN¥389.2m net cash position.

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¥171.9m due within a year, and liabilities of CN¥5.48m falling due after that. On the other hand, it had cash of CN¥400.5m and CN¥263.4m worth of receivables due within a year. So it can boast CN¥486.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Chengdu Information Technology of Chinese Academy of SciencesLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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!

In fact Chengdu Information Technology of Chinese Academy of SciencesLtd's saving grace is its low debt levels, because its EBIT has tanked 80% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chengdu Information Technology of Chinese Academy of SciencesLtd's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Chengdu Information Technology of Chinese Academy of SciencesLtd 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Chengdu Information Technology of Chinese Academy of SciencesLtd has net cash of CN¥389.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 259% of that EBIT to free cash flow, bringing in CN¥44m. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Chengdu Information Technology of Chinese Academy of SciencesLtd (of which 1 makes us a bit uncomfortable!) you should know about.

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.