Is Inspur Digital Enterprise Technology (HKG:596) Using Too Much Debt?

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

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Inspur Digital Enterprise Technology

What Is Inspur Digital Enterprise Technology's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Inspur Digital Enterprise Technology had debt of CN¥175.5m, up from CN¥94.0m in one year. However, its balance sheet shows it holds CN¥539.1m in cash, so it actually has CN¥363.6m net cash.

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¥3.87b due within 12 months, and liabilities of CN¥277.7m due beyond 12 months. Offsetting this, it had CN¥539.1m in cash and CN¥3.43b in receivables that were due within 12 months. So its liabilities total CN¥170.6m more than the combination of its cash and short-term receivables.

Of course, Inspur Digital Enterprise Technology has a market capitalization of CN¥3.79b, so these liabilities are probably manageable. 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¥141m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Inspur Digital Enterprise Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last year, Inspur Digital Enterprise Technology's free cash flow amounted to 32% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Inspur Digital Enterprise Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥363.6m. So we don't have any problem with Inspur Digital Enterprise Technology's use of debt. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.