We Think China ITS (Holdings) (HKG:1900) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that China ITS (Holdings) Co., Ltd. (HKG:1900) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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 China ITS (Holdings)

What Is China ITS (Holdings)'s Debt?

You can click the graphic below for the historical numbers, but it shows that China ITS (Holdings) had CN¥357.5m of debt in June 2022, down from CN¥523.6m, one year before. But it also has CN¥358.2m in cash to offset that, meaning it has CN¥705.0k net cash.

A Look At China ITS (Holdings)'s Liabilities

We can see from the most recent balance sheet that China ITS (Holdings) had liabilities of CN¥1.11b falling due within a year, and liabilities of CN¥33.6m due beyond that. On the other hand, it had cash of CN¥358.2m and CN¥728.0m worth of receivables due within a year. So its liabilities total CN¥59.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since China ITS (Holdings) has a market capitalization of CN¥211.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, China ITS (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, China ITS (Holdings) grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is China ITS (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While China ITS (Holdings) does have more liabilities than liquid assets, it also has net cash of CN¥705.0k. And it impressed us with free cash flow of CN¥328m, being 125% of its EBIT. So we don't think China ITS (Holdings)'s use of debt is risky. 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 China ITS (Holdings) is showing 1 warning sign in our investment analysis , you should know about...

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.