Does iSoftStone Information Technology (Group) (SZSE:301236) Have A 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 iSoftStone Information Technology (Group) Co., Ltd. (SZSE:301236) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for iSoftStone Information Technology (Group)

What Is iSoftStone Information Technology (Group)'s Debt?

The image below, which you can click on for greater detail, shows that at December 2023 iSoftStone Information Technology (Group) had debt of CN¥2.37b, up from CN¥2.25b in one year. But on the other hand it also has CN¥6.25b in cash, leading to a CN¥3.87b net cash position.

How Healthy Is iSoftStone Information Technology (Group)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that iSoftStone Information Technology (Group) had liabilities of CN¥4.76b due within 12 months and liabilities of CN¥261.3m due beyond that. On the other hand, it had cash of CN¥6.25b and CN¥5.52b worth of receivables due within a year. So it can boast CN¥6.75b more liquid assets than total liabilities.

This surplus suggests that iSoftStone Information Technology (Group) is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that iSoftStone Information Technology (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact iSoftStone Information Technology (Group)'s saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine iSoftStone Information Technology (Group)'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. iSoftStone Information Technology (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. Over the most recent three years, iSoftStone Information Technology (Group) recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 iSoftStone Information Technology (Group) has net cash of CN¥3.87b, as well as more liquid assets than liabilities. So we don't have any problem with iSoftStone Information Technology (Group)'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for iSoftStone Information Technology (Group) you should know about.

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.