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.' 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 Satellite Communications Co., Ltd. (SHSE:601698) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is China Satellite Communications's Debt?

The image below, which you can click on for greater detail, shows that China Satellite Communications had debt of CN¥15.0m at the end of March 2024, a reduction from CN¥20.0m over a year. But it also has CN¥7.28b in cash to offset that, meaning it has CN¥7.26b net cash.

How Healthy Is China Satellite Communications' Balance Sheet?

According to the last reported balance sheet, China Satellite Communications had liabilities of CN¥1.75b due within 12 months, and liabilities of CN¥1.29b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.28b as well as receivables valued at CN¥666.2m due within 12 months. So it can boast CN¥4.90b more liquid assets than total liabilities.

This short term liquidity is a sign that China Satellite Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Satellite Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, China Satellite Communications's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Satellite Communications's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Satellite Communications 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. In the last three years, China Satellite Communications created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Satellite Communications has CN¥7.26b in net cash and a decent-looking balance sheet. So we are not troubled with China Satellite Communications'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. To that end, you should be aware of the 2 warning signs we've spotted with China Satellite Communications .

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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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.