Is SDIC Intelligence Xiamen Information (SZSE:300188) 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.' 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. Importantly, SDIC Intelligence Xiamen Information Co., Ltd. (SZSE:300188) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SDIC Intelligence Xiamen Information

What Is SDIC Intelligence Xiamen Information's Net Debt?

As you can see below, SDIC Intelligence Xiamen Information had CN¥150.5m of debt at March 2024, down from CN¥356.7m a year prior. But it also has CN¥958.9m in cash to offset that, meaning it has CN¥808.4m net cash.

How Healthy Is SDIC Intelligence Xiamen Information's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SDIC Intelligence Xiamen Information had liabilities of CN¥1.21b due within 12 months and liabilities of CN¥243.6m due beyond that. On the other hand, it had cash of CN¥958.9m and CN¥1.55b worth of receivables due within a year. So it actually has CN¥1.06b more liquid assets than total liabilities.

This short term liquidity is a sign that SDIC Intelligence Xiamen Information could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SDIC Intelligence Xiamen Information boasts net cash, so it's fair to say it does not have a heavy debt load! 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 SDIC Intelligence Xiamen Information'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.

Over 12 months, SDIC Intelligence Xiamen Information made a loss at the EBIT level, and saw its revenue drop to CN¥2.0b, which is a fall of 3.6%. That's not what we would hope to see.

So How Risky Is SDIC Intelligence Xiamen Information?

Although SDIC Intelligence Xiamen Information had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥67m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 SDIC Intelligence Xiamen Information's profit, revenue, and operating cashflow have changed over the last few years.

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.