David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, COFCO Technology & Industry Co., Ltd. (SZSE:301058) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for COFCO Technology & Industry
What Is COFCO Technology & Industry's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 COFCO Technology & Industry had CN¥63.7m of debt, an increase on CN¥54.7m, over one year. However, its balance sheet shows it holds CN¥1.28b in cash, so it actually has CN¥1.22b net cash.
How Healthy Is COFCO Technology & Industry's Balance Sheet?
The latest balance sheet data shows that COFCO Technology & Industry had liabilities of CN¥1.76b due within a year, and liabilities of CN¥71.3m falling due after that. On the other hand, it had cash of CN¥1.28b and CN¥1.11b worth of receivables due within a year. So it can boast CN¥566.3m more liquid assets than total liabilities.
This surplus suggests that COFCO Technology & Industry has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, COFCO Technology & Industry boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, COFCO Technology & Industry grew its EBIT by 6.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if COFCO Technology & Industry can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While COFCO Technology & Industry 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, COFCO Technology & Industry produced sturdy free cash flow equating to 74% 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 COFCO Technology & Industry has CN¥1.22b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥159m, being 74% of its EBIT. So is COFCO Technology & Industry'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for COFCO Technology & Industry you should know about.
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. 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.