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 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. As with many other companies CETC Digital Technology Co.,Ltd. (SHSE:600850) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is CETC Digital TechnologyLtd's Debt?

As you can see below, CETC Digital TechnologyLtd had CN¥114.0m of debt at June 2024, down from CN¥241.8m a year prior. However, it does have CN¥847.0m in cash offsetting this, leading to net cash of CN¥733.0m.

A Look At CETC Digital TechnologyLtd's Liabilities

The latest balance sheet data shows that CETC Digital TechnologyLtd had liabilities of CN¥5.12b due within a year, and liabilities of CN¥444.9m falling due after that. Offsetting this, it had CN¥847.0m in cash and CN¥2.98b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.74b more than its cash and near-term receivables, combined.

Of course, CETC Digital TechnologyLtd has a market capitalization of CN¥14.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, CETC Digital TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

While CETC Digital TechnologyLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 CETC Digital TechnologyLtd'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. CETC Digital TechnologyLtd 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. Over the last three years, CETC Digital TechnologyLtd reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While CETC Digital TechnologyLtd does have more liabilities than liquid assets, it also has net cash of CN¥733.0m. So we are not troubled with CETC Digital TechnologyLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CETC Digital TechnologyLtd , and understanding them should be part of your investment process.

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.