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 INESA Intelligent Tech Inc. (SHSE:600602) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for INESA Intelligent Tech
How Much Debt Does INESA Intelligent Tech Carry?
You can click the graphic below for the historical numbers, but it shows that INESA Intelligent Tech had CN¥143.6m of debt in September 2023, down from CN¥159.9m, one year before. However, it does have CN¥3.36b in cash offsetting this, leading to net cash of CN¥3.22b.
How Strong Is INESA Intelligent Tech's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that INESA Intelligent Tech had liabilities of CN¥1.82b due within 12 months and liabilities of CN¥249.8m due beyond that. On the other hand, it had cash of CN¥3.36b and CN¥1.34b worth of receivables due within a year. So it can boast CN¥2.63b more liquid assets than total liabilities.
This surplus suggests that INESA Intelligent Tech is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, INESA Intelligent Tech boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for INESA Intelligent Tech if management cannot prevent a repeat of the 21% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is INESA Intelligent Tech'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While INESA Intelligent Tech 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. During the last three years, INESA Intelligent Tech burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that INESA Intelligent Tech has net cash of CN¥3.22b, as well as more liquid assets than liabilities. So we don't have any problem with INESA Intelligent Tech's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for INESA Intelligent Tech (of which 1 can't be ignored!) 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.