Is Emdoor InformationLTD (SZSE:001314) Using Too Much Debt?

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 Emdoor Information CO.,LTD. (SZSE:001314) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Emdoor InformationLTD

What Is Emdoor InformationLTD's Debt?

As you can see below, Emdoor InformationLTD had CN¥94.8m of debt at March 2024, down from CN¥265.3m a year prior. However, it does have CN¥1.26b in cash offsetting this, leading to net cash of CN¥1.17b.

How Healthy Is Emdoor InformationLTD's Balance Sheet?

The latest balance sheet data shows that Emdoor InformationLTD had liabilities of CN¥889.7m due within a year, and liabilities of CN¥58.8m falling due after that. Offsetting these obligations, it had cash of CN¥1.26b as well as receivables valued at CN¥259.6m due within 12 months. So it actually has CN¥573.4m 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!

It is just as well that Emdoor InformationLTD's load is not too heavy, because its EBIT was down 81% over the last year. 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 ultimately the future profitability of the business will decide if Emdoor InformationLTD 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Emdoor InformationLTD 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 last three years, Emdoor InformationLTD recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Emdoor InformationLTD has CN¥1.17b in net cash and a decent-looking balance sheet. So while Emdoor InformationLTD does not have a great balance sheet, it's certainly not too bad. 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. We've identified 4 warning signs with Emdoor InformationLTD (at least 1 which is significant) , and understanding them should be part of your investment process.

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.