Is China Information Technology Development (HKG:8178) 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 China Information Technology Development Limited (HKG:8178) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 at June 2024 China Information Technology Development had debt of HK$64.0m, up from HK$60.7m in one year. However, it does have HK$13.5m in cash offsetting this, leading to net debt of about HK$50.5m.

A Look At China Information Technology Development's Liabilities

We can see from the most recent balance sheet that China Information Technology Development had liabilities of HK$61.7m falling due within a year, and liabilities of HK$24.8m due beyond that. Offsetting these obligations, it had cash of HK$13.5m as well as receivables valued at HK$55.4m due within 12 months. So it has liabilities totalling HK$17.6m more than its cash and near-term receivables, combined.

Given China Information Technology Development has a market capitalization of HK$245.4m, it's hard to believe these liabilities pose much threat. 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.

In the last year China Information Technology Development had a loss before interest and tax, and actually shrunk its revenue by 55%, to HK$29m. To be frank that doesn't bode well.

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 HK$22m 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. Another cause for caution is that is bled HK$14m 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for China Information Technology Development (of which 1 is significant!) you should know about.

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.