Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Infore Environment Technology Group Co., Ltd. (SZSE:000967) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

What Is Infore Environment Technology Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Infore Environment Technology Group had CN¥3.76b in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥4.29b in cash, leading to a CN¥535.1m net cash position.

A Look At Infore Environment Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Infore Environment Technology Group had liabilities of CN¥6.96b due within 12 months and liabilities of CN¥3.99b due beyond that. Offsetting these obligations, it had cash of CN¥4.29b as well as receivables valued at CN¥6.97b due within 12 months. So it can boast CN¥308.3m more liquid assets than total liabilities.

This state of affairs indicates that Infore Environment Technology Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥16.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Infore Environment Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Infore Environment Technology Group saw its EBIT decline by 8.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Infore Environment Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Infore Environment Technology Group 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. Over the most recent three years, Infore Environment Technology Group recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Infore Environment Technology Group has net cash of CN¥535.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥63m, being 75% of its EBIT. So we don't think Infore Environment Technology Group's use of debt is risky. 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. Be aware that Infore Environment Technology Group is showing 1 warning sign in our investment analysis , you should know about...

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.