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. Importantly, China Satellite Communications Co., Ltd. (SHSE:601698) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is China Satellite Communications's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 China Satellite Communications had debt of CN¥44.1m, up from CN¥20.0m in one year. However, its balance sheet shows it holds CN¥7.28b in cash, so it actually has CN¥7.23b net cash.

How Strong Is China Satellite Communications' Balance Sheet?

The latest balance sheet data shows that China Satellite Communications had liabilities of CN¥1.75b due within a year, and liabilities of CN¥1.29b falling due after that. On the other hand, it had cash of CN¥7.28b and CN¥666.2m worth of receivables due within a year. So it actually has CN¥4.90b more liquid assets than total liabilities.

This short term liquidity is a sign that China Satellite Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Satellite Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that China Satellite Communications has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Satellite Communications will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China Satellite Communications 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 three years, China Satellite Communications reported free cash flow worth 15% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Satellite Communications has net cash of CN¥7.23b, as well as more liquid assets than liabilities. So we are not troubled with China Satellite Communications's debt use. 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 2 warning signs for China Satellite Communications 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. 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.