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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Inmyshow Digital Technology(Group)Co.,Ltd. (SHSE:600556) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Inmyshow Digital Technology(Group)Co.Ltd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Inmyshow Digital Technology(Group)Co.Ltd had CN¥879.0m of debt, an increase on CN¥369.2m, over one year. But it also has CN¥1.91b in cash to offset that, meaning it has CN¥1.03b net cash.
How Strong Is Inmyshow Digital Technology(Group)Co.Ltd's Balance Sheet?
According to the last reported balance sheet, Inmyshow Digital Technology(Group)Co.Ltd had liabilities of CN¥1.90b due within 12 months, and liabilities of CN¥36.9m due beyond 12 months. On the other hand, it had cash of CN¥1.91b and CN¥2.70b worth of receivables due within a year. So it can boast CN¥2.67b more liquid assets than total liabilities.
It's good to see that Inmyshow Digital Technology(Group)Co.Ltd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Inmyshow Digital Technology(Group)Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Inmyshow Digital Technology(Group)Co.Ltd's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. 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 Inmyshow Digital Technology(Group)Co.Ltd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Inmyshow Digital Technology(Group)Co.Ltd 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, Inmyshow Digital Technology(Group)Co.Ltd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Inmyshow Digital Technology(Group)Co.Ltd has net cash of CN¥1.03b, as well as more liquid assets than liabilities. So we are not troubled with Inmyshow Digital Technology(Group)Co.Ltd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Inmyshow Digital Technology(Group)Co.Ltd , and understanding them should be part of your investment process.
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.