Is Emdoor InformationLTD (SZSE:001314) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Emdoor Information CO.,LTD. (SZSE:001314) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Emdoor InformationLTD

What Is Emdoor InformationLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Emdoor InformationLTD had CN¥273.3m of debt, an increase on CN¥4.82m, over one year. However, its balance sheet shows it holds CN¥1.36b in cash, so it actually has CN¥1.08b net cash.

How Healthy Is Emdoor InformationLTD's Balance Sheet?

According to the last reported balance sheet, Emdoor InformationLTD had liabilities of CN¥1.23b due within 12 months, and liabilities of CN¥58.8m due beyond 12 months. Offsetting this, it had CN¥1.36b in cash and CN¥476.8m in receivables that were due within 12 months. So it actually has CN¥541.8m more liquid assets than total liabilities.

This surplus suggests that Emdoor InformationLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Emdoor InformationLTD 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 it is future earnings, more than anything, that will determine Emdoor InformationLTD's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Emdoor InformationLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥3.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Emdoor InformationLTD?

While Emdoor InformationLTD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥55m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 21% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Emdoor InformationLTD you should be aware of, and 2 of them are significant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.