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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that iSoftStone Information Technology (Group) Co., Ltd. (SZSE:301236) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does iSoftStone Information Technology (Group) Carry?

As you can see below, at the end of December 2023, iSoftStone Information Technology (Group) had CN¥2.37b of debt, up from CN¥2.25b a year ago. Click the image for more detail. But on the other hand it also has CN¥6.25b in cash, leading to a CN¥3.87b net cash position.

A Look At iSoftStone Information Technology (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that iSoftStone Information Technology (Group) had liabilities of CN¥4.76b due within 12 months and liabilities of CN¥261.3m due beyond that. Offsetting these obligations, it had cash of CN¥6.25b as well as receivables valued at CN¥5.52b due within 12 months. So it can boast CN¥6.75b more liquid assets than total liabilities.

This surplus suggests that iSoftStone Information Technology (Group) is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that iSoftStone Information Technology (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for iSoftStone Information Technology (Group) if management cannot prevent a repeat of the 55% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if iSoftStone Information Technology (Group) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. iSoftStone Information Technology (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, iSoftStone Information Technology (Group) produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case iSoftStone Information Technology (Group) has CN¥3.87b in net cash and a decent-looking balance sheet. So we are not troubled with iSoftStone Information Technology (Group)'s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with iSoftStone Information Technology (Group) .

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.