Is China Information Technology Development (HKG:8178) Using Debt In A Risky Way?

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 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. As with many other companies China Information Technology Development Limited (HKG:8178) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does China Information Technology Development Carry?

You can click the graphic below for the historical numbers, but it shows that China Information Technology Development had HK$107.8m of debt in December 2020, down from HK$115.7m, one year before. However, because it has a cash reserve of HK$35.0m, its net debt is less, at about HK$72.8m.

A Look At China Information Technology Development's Liabilities

The latest balance sheet data shows that China Information Technology Development had liabilities of HK$56.5m due within a year, and liabilities of HK$88.0m falling due after that. On the other hand, it had cash of HK$35.0m and HK$52.0m worth of receivables due within a year. So it has liabilities totalling HK$57.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$58.2m, so it does suggest shareholders should keep an eye on China Information Technology Development's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

While China Information Technology Development's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$20m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$9.8m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for China Information Technology Development (1 is a bit concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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