Is the development of information technologies in China (HKG:8178) weighed down by its debt?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Development of information technology in China limited (HKG:8178) uses debt. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for the development of information technology in China

What is China Information Technology Development’s net debt?

As you can see below, at the end of June 2022, China Information Technology Development had a debt of HK$135.5 million, compared to HK$91.0 million a year ago. Click on the image for more details. However, since it has a cash reserve of HK$30.6 million, its net debt is lower at around HK$105.0 million.

SEHK: 8178 Historical Debt to Equity September 8, 2022

How strong is the track record of information technology development in China?

Zooming in on the latest balance sheet data, we can see that China Information Technology Development had liabilities of HK$87.4 million due within 12 months and liabilities of HK$84.4 million due beyond. As compensation for these obligations, it had liquid assets of HK$30.6 million as well as receivables valued at HK$42.9 million and payable within 12 months. It therefore has liabilities totaling HK$98.3 million more than its cash and short-term receivables, combined.

Given that this deficit is actually greater than the company’s market capitalization of HK$81.8 million, we think shareholders should really be watching China Information Technology Development’s debt levels, like a parent watching their child riding a bicycle for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since China Information Technology Development will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

It seems likely that shareholders will be hoping that China Information Technology Development can significantly advance the business plan before too long, as it does not have significant revenue at the moment.

Caveat Emptor

It is important to note that China Information Technology Development posted a loss of earnings before interest and taxes (EBIT) over the past year. Its EBIT loss was HK$32 million. Considering that, along with the liabilities mentioned above, we are nervous about the business. We would like to see strong improvements in the short term before getting too interested in the title. Not least because it has burned HK$5.2 million in negative free cash flow over the past year. So suffice it to say that we consider the stock to be risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 harbingers of the development of information technology in China which you should be aware of.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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