Stock Analysis

Does Inspur Digital Enterprise Technology (HKG:596) Have A Healthy Balance Sheet?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Inspur Digital Enterprise Technology Limited (HKG:596) does carry debt. 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. 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. 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 Inspur Digital Enterprise Technology

What Is Inspur Digital Enterprise Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Inspur Digital Enterprise Technology had CN¥146.0m of debt, an increase on none, over one year. However, it does have CN¥1.28b in cash offsetting this, leading to net cash of CN¥1.13b.

SEHK:596 Debt to Equity History June 3rd 2024

How Strong Is Inspur Digital Enterprise Technology's Balance Sheet?

According to the last reported balance sheet, Inspur Digital Enterprise Technology had liabilities of CN¥3.92b due within 12 months, and liabilities of CN¥311.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.28b as well as receivables valued at CN¥2.82b due within 12 months. So its liabilities total CN¥125.7m more than the combination of its cash and short-term receivables.

Since publicly traded Inspur Digital Enterprise Technology shares are worth a total of CN¥4.00b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Inspur Digital Enterprise Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Inspur Digital Enterprise Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥93m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Inspur Digital Enterprise Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Inspur Digital Enterprise Technology 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 year, Inspur Digital Enterprise Technology 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 look at a company's total liabilities, it is very reassuring that Inspur Digital Enterprise Technology has CN¥1.13b in net cash. And it impressed us with free cash flow of CN¥198m, being 213% of its EBIT. So is Inspur Digital Enterprise Technology's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Inspur Digital Enterprise Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Inspur Digital Enterprise Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.