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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, China ITS (Holdings) Co., Ltd. (HKG:1900) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for China ITS (Holdings)

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

The image below, which you can click on for greater detail, shows that at June 2024 China ITS (Holdings) had debt of CN¥285.2m, up from CN¥171.2m in one year. But on the other hand it also has CN¥452.4m in cash, leading to a CN¥167.2m net cash position.

How Healthy Is China ITS (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China ITS (Holdings) had liabilities of CN¥964.3m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CN¥452.4m as well as receivables valued at CN¥757.9m due within 12 months. So it can boast CN¥246.1m more liquid assets than total liabilities.

This luscious liquidity implies that China ITS (Holdings)'s balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China ITS (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that China ITS (Holdings) grew its EBIT by 17% last year, making its debt load easier to handle. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 it is always sensible to investigate a company's debt, in this case China ITS (Holdings) has CN¥167.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in CN¥42m. The bottom line is that China ITS (Holdings)'s use of debt is absolutely fine. 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. Case in point: We've spotted 4 warning signs for China ITS (Holdings) you should be aware of.

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.

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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.