Does China Security (SHSE:600654) Have A Healthy Balance Sheet?

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.' 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. We note that China Security Co., Ltd. (SHSE:600654) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for China Security

What Is China Security's Net Debt?

The image below, which you can click on for greater detail, shows that China Security had debt of CN¥223.5m at the end of June 2024, a reduction from CN¥285.2m over a year. But on the other hand it also has CN¥680.4m in cash, leading to a CN¥456.9m net cash position.

A Look At China Security's Liabilities

According to the last reported balance sheet, China Security had liabilities of CN¥1.86b due within 12 months, and liabilities of CN¥284.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥680.4m as well as receivables valued at CN¥1.62b due within 12 months. So it actually has CN¥159.7m more liquid assets than total liabilities.

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

Although China Security made a loss at the EBIT level, last year, it was also good to see that it generated CN¥117m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Security'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, a company can only pay off debt with cold hard cash, not accounting profits. While China Security 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 most recent year, China Security recorded free cash flow worth 56% 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 China Security has net cash of CN¥456.9m, as well as more liquid assets than liabilities. So is China Security's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for China Security that you should be aware of.

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.