Is Asiainfo Technologies (HKG:1675) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Asiainfo Technologies Limited (HKG:1675) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Asiainfo Technologies

How Much Debt Does Asiainfo Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Asiainfo Technologies had CN¥858.0m of debt, an increase on CN¥585.7m, over one year. But it also has CN¥1.81b in cash to offset that, meaning it has CN¥950.4m net cash.

How Healthy Is Asiainfo Technologies's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asiainfo Technologies had liabilities of CN¥3.38b due within 12 months and liabilities of CN¥248.3m due beyond that. On the other hand, it had cash of CN¥1.81b and CN¥2.49b worth of receivables due within a year. So it actually has CN¥677.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Asiainfo Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Asiainfo Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Asiainfo Technologies has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Asiainfo Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Asiainfo Technologies 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, Asiainfo Technologies actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Asiainfo Technologies has CN¥950.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥695m, being 129% of its EBIT. So we don't think Asiainfo Technologies's use of debt is risky. 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. Be aware that Asiainfo Technologies is showing 3 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you decide to trade Asiainfo Technologies, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.