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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Accelink Technologies Co,Ltd. (SZSE:002281) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Accelink Technologies CoLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Accelink Technologies CoLtd had CN¥412.8m of debt in March 2024, down from CN¥535.9m, one year before. But it also has CN¥3.70b in cash to offset that, meaning it has CN¥3.29b net cash.

How Healthy Is Accelink Technologies CoLtd's Balance Sheet?

According to the last reported balance sheet, Accelink Technologies CoLtd had liabilities of CN¥3.05b due within 12 months, and liabilities of CN¥440.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.70b as well as receivables valued at CN¥2.19b due within 12 months. So it can boast CN¥2.40b more liquid assets than total liabilities.

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

The good news is that Accelink Technologies CoLtd has increased its EBIT by 6.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Accelink Technologies CoLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Accelink Technologies CoLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Accelink Technologies CoLtd recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Accelink Technologies CoLtd has CN¥3.29b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.8% over the last year. So we are not troubled with Accelink Technologies CoLtd's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Accelink Technologies CoLtd's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com