We Think China Communications Services (HKG:552) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies China Communications Services Corporation Limited (HKG:552) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Communications Services

What Is China Communications Services's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 China Communications Services had debt of CN¥972.8m, up from CN¥850.0m in one year. But it also has CN¥22.0b in cash to offset that, meaning it has CN¥21.0b net cash.

A Look At China Communications Services' Liabilities

We can see from the most recent balance sheet that China Communications Services had liabilities of CN¥74.2b falling due within a year, and liabilities of CN¥2.12b due beyond that. On the other hand, it had cash of CN¥22.0b and CN¥55.5b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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

Also good is that China Communications Services grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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 China Communications Services'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 company can only pay off debt with cold hard cash, not accounting profits. China Communications Services 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. Happily for any shareholders, China Communications Services actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Communications Services has CN¥21.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 153% of that EBIT to free cash flow, bringing in CN¥4.9b. So is China Communications Services's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with China Communications Services .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.