Health Check: How Prudently Does Inspur Digital Enterprise Technology (HKG:596) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Inspur Digital Enterprise Technology Limited (HKG:596) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Inspur Digital Enterprise Technology

What Is Inspur Digital Enterprise Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Inspur Digital Enterprise Technology had debt of CN¥94.0m, up from none in one year. However, it does have CN¥499.0m in cash offsetting this, leading to net cash of CN¥405.0m.

A Look At Inspur Digital Enterprise Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Inspur Digital Enterprise Technology had liabilities of CN¥2.66b due within 12 months and liabilities of CN¥323.2m due beyond that. Offsetting these obligations, it had cash of CN¥499.0m as well as receivables valued at CN¥2.23b due within 12 months. So its liabilities total CN¥254.2m more than the combination of its cash and short-term receivables.

Given Inspur Digital Enterprise Technology has a market capitalization of CN¥2.28b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Inspur Digital Enterprise Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Inspur Digital Enterprise Technology reported revenue of CN¥9.0b, which is a gain of 122%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Inspur Digital Enterprise Technology?

Although Inspur Digital Enterprise Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥140m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that Inspur Digital Enterprise Technology is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Inspur Digital Enterprise Technology has 2 warning signs (and 1 which is potentially serious) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.