The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that CICT Mobile Communication Technology Co., Ltd. (SHSE:688387) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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¥1.74b of debt at June 2024, down from CN¥2.06b a year prior. However, it does have CN¥4.12b in cash offsetting this, leading to net cash of CN¥2.39b.

A Look At CICT Mobile Communication Technology's Liabilities

The latest balance sheet data shows that CICT Mobile Communication Technology had liabilities of CN¥6.39b due within a year, and liabilities of CN¥691.0m falling due after that. Offsetting this, it had CN¥4.12b in cash and CN¥6.33b in receivables that were due within 12 months. So it can boast CN¥3.37b 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. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, CICT Mobile Communication Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, CICT Mobile Communication Technology made a loss at the EBIT level, and saw its revenue drop to CN¥7.4b, which is a fall of 4.2%. That's not what we would hope to see.

So How Risky Is CICT Mobile Communication Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year CICT Mobile Communication Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥858m of cash and made a loss of CN¥346m. But the saving grace is the CN¥2.39b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like CICT Mobile Communication Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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