These 4 Measures Indicate That China ITS (Holdings) (HKG:1900) Is Using Debt Safely

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.' 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, China ITS (Holdings) Co., Ltd. (HKG:1900) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China ITS (Holdings)

What Is China ITS (Holdings)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that China ITS (Holdings) had CN¥171.2m of debt in June 2023, down from CN¥368.1m, one year before. But on the other hand it also has CN¥327.5m in cash, leading to a CN¥156.3m net cash position.

A Look At China ITS (Holdings)'s Liabilities

According to the last reported balance sheet, China ITS (Holdings) had liabilities of CN¥872.5m due within 12 months, and liabilities of CN¥1.27m due beyond 12 months. Offsetting these obligations, it had cash of CN¥327.5m as well as receivables valued at CN¥863.6m due within 12 months. So it actually has CN¥317.4m more liquid assets than total liabilities.

This surplus strongly suggests that China ITS (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China ITS (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

China ITS (Holdings)'s EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China ITS (Holdings) will need earnings to service that debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While China ITS (Holdings) 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, China ITS (Holdings) 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 China ITS (Holdings) has CN¥156.3m in net cash and a strong balance sheet. The cherry on top was that in converted 236% of that EBIT to free cash flow, bringing in CN¥150m. So we don't think China ITS (Holdings)'s use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for China ITS (Holdings) you should be aware of.

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.