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.' 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. As with many other companies CICT Mobile Communication Technology Co., Ltd. (SHSE:688387) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is CICT Mobile Communication Technology's Net Debt?
As you can see below, CICT Mobile Communication Technology had CN¥1.76b of debt at March 2024, down from CN¥2.07b a year prior. However, its balance sheet shows it holds CN¥4.37b in cash, so it actually has CN¥2.61b net cash.
A Look At CICT Mobile Communication Technology's Liabilities
According to the last reported balance sheet, CICT Mobile Communication Technology had liabilities of CN¥6.44b due within 12 months, and liabilities of CN¥726.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.37b as well as receivables valued at CN¥5.93b due within 12 months. So it actually has CN¥3.14b more liquid assets than total liabilities.
This surplus suggests that CICT Mobile Communication Technology 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. Simply put, the fact that CICT Mobile Communication Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CICT Mobile Communication Technology'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.
In the last year CICT Mobile Communication Technology's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is CICT Mobile Communication Technology?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CICT Mobile Communication Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥1.2b of cash and made a loss of CN¥553m. But the saving grace is the CN¥2.61b on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how CICT Mobile Communication Technology's profit, revenue, and operating cashflow have changed over the last few years.
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.