Here's Why Accelink Technologies CoLtd (SZSE:002281) Can Manage Its Debt Responsibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Accelink Technologies Co,Ltd. (SZSE:002281) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Accelink Technologies CoLtd

What Is Accelink Technologies CoLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Accelink Technologies CoLtd had debt of CN¥398.9m at the end of September 2024, a reduction from CN¥485.6m over a year. However, its balance sheet shows it holds CN¥2.86b in cash, so it actually has CN¥2.46b net cash.

A Look At Accelink Technologies CoLtd's Liabilities

The latest balance sheet data shows that Accelink Technologies CoLtd had liabilities of CN¥4.25b due within a year, and liabilities of CN¥500.9m falling due after that. On the other hand, it had cash of CN¥2.86b and CN¥3.23b worth of receivables due within a year. So it actually has CN¥1.34b more liquid assets than total liabilities.

This surplus suggests that Accelink Technologies CoLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Accelink Technologies CoLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Accelink Technologies CoLtd grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. 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 Accelink Technologies CoLtd'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. While Accelink Technologies CoLtd 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 last three years, Accelink Technologies CoLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Accelink Technologies CoLtd has net cash of CN¥2.46b, as well as more liquid assets than liabilities. And we liked the look of last year's 82% year-on-year EBIT growth. So we don't have any problem with Accelink Technologies CoLtd's use of debt. 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. Be aware that Accelink Technologies CoLtd is showing 1 warning sign in our investment analysis , you should know about...

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.