Is CMST DevelopmentLtd (SHSE:600787) A Risky Investment?

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 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. Importantly, CMST Development Co.,Ltd. (SHSE:600787) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CMST DevelopmentLtd

How Much Debt Does CMST DevelopmentLtd Carry?

The image below, which you can click on for greater detail, shows that CMST DevelopmentLtd had debt of CN¥2.53b at the end of September 2024, a reduction from CN¥2.95b over a year. But it also has CN¥3.31b in cash to offset that, meaning it has CN¥780.5m net cash.

How Healthy Is CMST DevelopmentLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CMST DevelopmentLtd had liabilities of CN¥5.89b due within 12 months and liabilities of CN¥3.11b due beyond that. On the other hand, it had cash of CN¥3.31b and CN¥5.31b worth of receivables due within a year. So its liabilities total CN¥393.1m more than the combination of its cash and short-term receivables.

Since publicly traded CMST DevelopmentLtd shares are worth a total of CN¥14.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, CMST DevelopmentLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that CMST DevelopmentLtd has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CMST DevelopmentLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CMST DevelopmentLtd 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, CMST DevelopmentLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about CMST DevelopmentLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥780.5m. The cherry on top was that in converted 184% of that EBIT to free cash flow, bringing in CN¥245m. So is CMST DevelopmentLtd's debt a risk? It doesn't seem so to us. 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. Be aware that CMST DevelopmentLtd is showing 3 warning signs in our investment analysis , you should know about...

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.