Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies iSoftStone Information Technology (Group) Co., Ltd. (SZSE:301236) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for iSoftStone Information Technology (Group)

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

You can click the graphic below for the historical numbers, but it shows that iSoftStone Information Technology (Group) had CN¥1.68b of debt in September 2023, down from CN¥2.74b, one year before. But on the other hand it also has CN¥5.06b in cash, leading to a CN¥3.39b net cash position.

How Healthy Is iSoftStone Information Technology (Group)'s Balance Sheet?

According to the last reported balance sheet, iSoftStone Information Technology (Group) had liabilities of CN¥3.71b due within 12 months, and liabilities of CN¥363.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.06b as well as receivables valued at CN¥6.14b due within 12 months. So it actually has CN¥7.12b 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. Succinctly put, iSoftStone Information Technology (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that iSoftStone Information Technology (Group)'s load is not too heavy, because its EBIT was down 53% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine iSoftStone Information Technology (Group)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 53% 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¥3.39b in net cash and a decent-looking balance sheet. So we are not troubled with iSoftStone Information Technology (Group)'s debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with iSoftStone Information Technology (Group) (including 1 which can't be ignored) .

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.