Is Harbin Dongan Auto EngineLtd (SHSE:600178) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Harbin Dongan Auto Engine Co.,Ltd (SHSE:600178) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Harbin Dongan Auto EngineLtd

How Much Debt Does Harbin Dongan Auto EngineLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Harbin Dongan Auto EngineLtd had debt of CN¥340.2m, up from CN¥40.0m in one year. However, it does have CN¥1.32b in cash offsetting this, leading to net cash of CN¥984.4m.

A Look At Harbin Dongan Auto EngineLtd's Liabilities

According to the last reported balance sheet, Harbin Dongan Auto EngineLtd had liabilities of CN¥4.21b due within 12 months, and liabilities of CN¥118.3m due beyond 12 months. Offsetting this, it had CN¥1.32b in cash and CN¥2.12b in receivables that were due within 12 months. So its liabilities total CN¥883.5m more than the combination of its cash and short-term receivables.

Of course, Harbin Dongan Auto EngineLtd has a market capitalization of CN¥5.22b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Harbin Dongan Auto EngineLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Harbin Dongan Auto EngineLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Harbin Dongan Auto EngineLtd had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥4.9b. That makes us nervous, to say the least.

So How Risky Is Harbin Dongan Auto EngineLtd?

Although Harbin Dongan Auto EngineLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥31m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example Harbin Dongan Auto EngineLtd has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.