Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Accelink Technologies Co,Ltd. (SZSE:002281) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Accelink Technologies CoLtd Carry?
The image below, which you can click on for greater detail, shows that Accelink Technologies CoLtd had debt of CN¥398.9m at the end of September 2024, a reduction from CN¥485.6m over a year. However, its balance sheet shows it holds CN¥2.86b in cash, so it actually has CN¥2.46b net cash.
How Healthy Is Accelink Technologies CoLtd's Balance Sheet?
The latest balance sheet data shows that Accelink Technologies CoLtd had liabilities of CN¥4.25b due within a year, and liabilities of CN¥500.9m falling due after that. Offsetting this, it had CN¥2.86b in cash and CN¥3.23b in receivables that were due within 12 months. So it actually has CN¥1.34b more liquid assets than total liabilities.
This surplus suggests that Accelink Technologies CoLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Accelink Technologies CoLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Accelink Technologies CoLtd has boosted its EBIT by 82%, thus reducing the spectre of future debt repayments. 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 company can only pay off debt with cold hard cash, not accounting profits. Accelink Technologies CoLtd 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. During the last three years, Accelink Technologies CoLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Accelink Technologies CoLtd has CN¥2.46b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 82% over the last year. So we don't have any problem with Accelink Technologies CoLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Accelink Technologies CoLtd that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
