Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, BlueFocus Intelligent Communications Group Co., Ltd. (SZSE:300058) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does BlueFocus Intelligent Communications Group Carry?
You can click the graphic below for the historical numbers, but it shows that BlueFocus Intelligent Communications Group had CN¥2.22b of debt in September 2023, down from CN¥2.47b, one year before. However, its balance sheet shows it holds CN¥4.62b in cash, so it actually has CN¥2.40b net cash.
How Strong Is BlueFocus Intelligent Communications Group's Balance Sheet?
We can see from the most recent balance sheet that BlueFocus Intelligent Communications Group had liabilities of CN¥11.8b falling due within a year, and liabilities of CN¥1.15b due beyond that. Offsetting this, it had CN¥4.62b in cash and CN¥10.4b in receivables that were due within 12 months. So it can boast CN¥2.01b more liquid assets than total liabilities.
This surplus suggests that BlueFocus Intelligent Communications Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BlueFocus Intelligent Communications Group has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that BlueFocus Intelligent Communications Group's load is not too heavy, because its EBIT was down 85% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 BlueFocus Intelligent Communications Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BlueFocus Intelligent Communications Group 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. Happily for any shareholders, BlueFocus Intelligent Communications Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to investigate a company's debt, in this case BlueFocus Intelligent Communications Group has CN¥2.40b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 182% of that EBIT to free cash flow, bringing in CN¥769m. So we are not troubled with BlueFocus Intelligent Communications Group's debt use. While BlueFocus Intelligent Communications Group didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.
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.