CICT Mobile Communication Technology (SHSE:688387) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies CICT Mobile Communication Technology Co., Ltd. (SHSE:688387) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for CICT Mobile Communication Technology

What Is CICT Mobile Communication Technology's Debt?

The image below, which you can click on for greater detail, shows that CICT Mobile Communication Technology had debt of CN¥1.74b at the end of June 2024, a reduction from CN¥2.06b over a year. However, it does have CN¥4.12b in cash offsetting this, leading to net cash of CN¥2.39b.

How Strong Is CICT Mobile Communication Technology's Balance Sheet?

The latest balance sheet data shows that CICT Mobile Communication Technology had liabilities of CN¥6.39b due within a year, and liabilities of CN¥691.0m falling due after that. On the other hand, it had cash of CN¥4.12b and CN¥6.33b worth of receivables due within a year. So it actually has CN¥3.37b more liquid assets than total liabilities.

It's good to see that CICT Mobile Communication Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, CICT Mobile Communication Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CICT Mobile Communication Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, CICT Mobile Communication Technology made a loss at the EBIT level, and saw its revenue drop to CN¥7.4b, which is a fall of 4.2%. We would much prefer see growth.

So How Risky Is CICT Mobile Communication Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year CICT Mobile Communication Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥858m and booked a CN¥346m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.39b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how CICT Mobile Communication Technology's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.