Does China Information Technology Development (HKG:8178) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Information Technology Development Limited (HKG:8178) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Information Technology Development

What Is China Information Technology Development's Net Debt?

The image below, which you can click on for greater detail, shows that China Information Technology Development had debt of HK$109.5m at the end of June 2020, a reduction from HK$115.7m over a year. On the flip side, it has HK$58.2m in cash leading to net debt of about HK$51.3m.

A Look At China Information Technology Development's Liabilities

The latest balance sheet data shows that China Information Technology Development had liabilities of HK$69.6m due within a year, and liabilities of HK$77.7m falling due after that. Offsetting these obligations, it had cash of HK$58.2m as well as receivables valued at HK$74.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$15.1m.

Of course, China Information Technology Development has a market capitalization of HK$120.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Information Technology Development'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.

It seems likely shareholders hope that China Information Technology Development can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Over the last twelve months China Information Technology Development produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$12m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$23m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that China Information Technology Development is showing 2 warning signs 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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