Is Accelink Technologies CoLtd (SZSE:002281) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Accelink Technologies Co,Ltd. (SZSE:002281) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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.

View our latest analysis for Accelink Technologies CoLtd

What Is Accelink Technologies CoLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Accelink Technologies CoLtd had CN¥485.6m of debt in September 2023, down from CN¥564.1m, one year before. But it also has CN¥3.56b in cash to offset that, meaning it has CN¥3.07b net cash.

A Look At Accelink Technologies CoLtd's Liabilities

According to the last reported balance sheet, Accelink Technologies CoLtd had liabilities of CN¥2.96b due within 12 months, and liabilities of CN¥487.1m due beyond 12 months. Offsetting this, it had CN¥3.56b in cash and CN¥2.50b in receivables that were due within 12 months. So it can boast CN¥2.62b more liquid assets than total liabilities.

This short term liquidity is a sign that Accelink Technologies CoLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

It is just as well that Accelink Technologies CoLtd's load is not too heavy, because its EBIT was down 22% 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Accelink Technologies CoLtd 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. During the last three years, Accelink Technologies CoLtd produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. 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 Accelink Technologies CoLtd has net cash of CN¥3.07b, as well as more liquid assets than liabilities. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in CN¥9.1m. So we are not troubled with Accelink Technologies CoLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Accelink Technologies CoLtd has 2 warning signs we think you should be aware of.

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.