Is China Information Technology Development (HKG:8178) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that China Information Technology Development Limited (HKG:8178) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China Information Technology Development

What Is China Information Technology Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 China Information Technology Development had HK$137.7m of debt, an increase on HK$88.8m, over one year. However, it also had HK$15.3m in cash, and so its net debt is HK$122.4m.

How Healthy Is China Information Technology Development's Balance Sheet?

We can see from the most recent balance sheet that China Information Technology Development had liabilities of HK$157.1m falling due within a year, and liabilities of HK$35.5m due beyond that. Offsetting this, it had HK$15.3m in cash and HK$109.1m in receivables that were due within 12 months. So its liabilities total HK$68.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because China Information Technology Development is worth HK$124.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping China Information Technology Development can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Over the last twelve months China Information Technology Development produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$30m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$7.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for China Information Technology Development you should be aware of, and 1 of them shouldn't be ignored.

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.