Is China Technology Industry Group (HKG:8111) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, China Technology Industry Group Limited (HKG:8111) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for China Technology Industry Group

How Much Debt Does China Technology Industry Group Carry?

As you can see below, China Technology Industry Group had CN¥40.6m of debt at September 2020, down from CN¥73.6m a year prior. However, its balance sheet shows it holds CN¥41.5m in cash, so it actually has CN¥897.0k net cash.

How Strong Is China Technology Industry Group's Balance Sheet?

The latest balance sheet data shows that China Technology Industry Group had liabilities of CN¥77.1m due within a year, and liabilities of CN¥36.4m falling due after that. Offsetting this, it had CN¥41.5m in cash and CN¥133.5m in receivables that were due within 12 months. So it actually has CN¥61.4m more liquid assets than total liabilities.

This surplus liquidity suggests that China Technology Industry Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, China Technology Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, China Technology Industry Group turned things around in the last 12 months, delivering and EBIT of CN¥39m. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Technology Industry Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Technology Industry Group 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. Over the last year, China Technology Industry Group recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that China Technology Industry Group has net cash of CN¥897.0k, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥39m, being 99% of its EBIT. So is China Technology Industry Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with China Technology Industry Group .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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