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, China Communications Services Corporation Limited (HKG:552) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
See our latest analysis for China Communications Services
How Much Debt Does China Communications Services Carry?
The chart below, which you can click on for greater detail, shows that China Communications Services had CN¥861.1m in debt in December 2023; about the same as the year before. But on the other hand it also has CN¥29.6b in cash, leading to a CN¥28.7b net cash position.
How Healthy Is China Communications Services' Balance Sheet?
We can see from the most recent balance sheet that China Communications Services had liabilities of CN¥76.2b falling due within a year, and liabilities of CN¥1.88b due beyond that. Offsetting these obligations, it had cash of CN¥29.6b as well as receivables valued at CN¥58.4b due within 12 months. So it actually has CN¥9.87b more liquid assets than total liabilities.
This luscious liquidity implies that China Communications Services' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, China Communications Services boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that China Communications Services grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Communications Services'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. While China Communications Services 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. Over the last three years, China Communications Services actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that China Communications Services has net cash of CN¥28.7b, as well as more liquid assets than liabilities. The cherry on top was that in converted 184% of that EBIT to free cash flow, bringing in CN¥4.1b. The bottom line is that we do not find China Communications Services's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with China Communications Services .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.