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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that China Information Technology Development Limited (HKG:8178) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for China Information Technology Development
How Much Debt Does China Information Technology Development Carry?
As you can see below, China Information Technology Development had HK$49.6m of debt at June 2019, down from HK$70.8m a year prior. However, its balance sheet shows it holds HK$91.8m in cash, so it actually has HK$42.1m net cash.
How Healthy Is China Information Technology Development's Balance Sheet?
According to the last reported balance sheet, China Information Technology Development had liabilities of HK$104.6m due within 12 months, and liabilities of HK$4.17m due beyond 12 months. Offsetting this, it had HK$91.8m in cash and HK$73.2m in receivables that were due within 12 months. So it can boast HK$56.2m more liquid assets than total liabilities.
This short term liquidity is a sign that China Information Technology Development could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Information Technology Development has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is China Information Technology Development'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.
It seems likely shareholders hope that China Information Technology Development can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.