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Some say the best way to think about risk as an investor is volatility, not debt, but Warren Buffett famously said, “Volatility is far from synonymous with risk.” So when you think about the risk of any particular stock there are At what age, it’s obvious that you need to consider debt, as too much debt can sink a company.We have noticed iSoftStone Information Technology (Group) Co., Ltd. (SZSE:301236) does have debt on its balance sheet. But the real question is whether this debt creates risk for the company.
Why is debt risky?
Debt and other liabilities become a risk when a business cannot easily meet these obligations, either through free cash flow or by raising capital at an attractive price. An important part of capitalism is the process of “creative destruction”, where failed businesses are ruthlessly liquidated by bankers. While it’s less common, we often see heavily indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool for businesses, especially capital-intensive ones. When considering how much debt a business uses, the first thing to do is to consider both its cash and debt.
Check out our latest analysis for iSoftStone Information Technology (Group)
What is the debt of iSoftStone Information Technology (Group)?
The chart below shows that as of the end of September 2023, iSoftStone Information Technology (Group)’s debt was RMB 168 million, a decrease from RMB 274 million in the past year. However, it does have CN¥5.06b in cash offsetting this, resulting in net cash of CN¥3.39b.
How strong is the balance sheet of iSoftStone Information Technology (Group)?
The latest balance sheet data shows that iSoftStone Information Technology (Group) has liabilities due within one year of 371 million yuan, and liabilities due thereafter of 363.2 million yuan. Offsetting these obligations, it had CN¥5.06b in cash as well as CN¥6.14b worth of receivables due within 12 months.Therefore, its current assets ratio all Liabilities.
This excess liquidity shows that iSoftStone Information Technology (Group) is taking a cautious approach to debt. It is unlikely to face problems from lenders due to its strong net worth position. In short, iSoftStone has net cash and does not have a heavy debt load!
A modest debt load may be crucial for iSoftStone Information Technology (Group) if management cannot prevent a recurrence of last year’s 53% EBIT cut. When a company’s profits decline, it sometimes finds its relationships with lenders souring. Without a doubt, we learn the most about debt from the balance sheet. But what will most determine whether iSoftStone can maintain a healthy balance sheet in the future is future profits.So if you’re concerned about the future, you can look at this free A report showing analyst profit forecasts.
But our final consideration is also important, because a company can’t pay down debt with paper profits; it needs cash. While iSoftStone Information Technology (Group) has net cash on its balance sheet, its ability to convert earnings before interest and tax (EBIT) into free cash flow is still worth a look to help us understand how quickly it’s building (or eroding) )cash balance. Over the past three years, iSoftStone Information Technology (Group) has generated strong free cash flow equivalent to 53% of its EBIT, in line with our expectations. That cold hard cash means it can reduce debt when needed.
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While it’s always smart to investigate a company’s debt, in this case iSoftStone Information Technology (Group) has net cash of ¥339m and a balance sheet that looks great. Therefore, we do not have any problems with the use of debt of iSoftStone Information Technology (Group). There’s no doubt that we learn the most about debt from the balance sheet. But ultimately, every company may contain risks beyond its balance sheet.Please note that iSoftStone Information Technology (Group) is showing 2 warning signs in our investment analysis 1 of which is a bit concerning…
At the end of the day, it’s usually best to focus on companies with no net debt. You can access our special list of such companies (all with a track record of growing profits). free.
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see if iSoftStone Information Technology (Group) could be overvalued or undervalued by looking at our comprehensive analysis, which includes Fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This article from Simply Wall St is general in nature. We only use unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative information. Simply Wall St does not hold a position in any of the stocks mentioned.
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