Changchun Engley Automobile IndustryLtd (SHSE:601279) Has A Pretty Healthy Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Changchun Engley Automobile Industry Co.,Ltd. (SHSE:601279) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Changchun Engley Automobile IndustryLtd

How Much Debt Does Changchun Engley Automobile IndustryLtd Carry?

As you can see below, Changchun Engley Automobile IndustryLtd had CN¥1.39b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥1.61b in cash to offset that, meaning it has CN¥217.4m net cash.

How Strong Is Changchun Engley Automobile IndustryLtd's Balance Sheet?

We can see from the most recent balance sheet that Changchun Engley Automobile IndustryLtd had liabilities of CN¥2.56b falling due within a year, and liabilities of CN¥1.01b due beyond that. Offsetting this, it had CN¥1.61b in cash and CN¥1.43b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥528.8m.

Of course, Changchun Engley Automobile IndustryLtd has a market capitalization of CN¥5.58b, 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, Changchun Engley Automobile IndustryLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Changchun Engley Automobile IndustryLtd grew its EBIT by 268% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Changchun Engley Automobile IndustryLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Changchun Engley Automobile IndustryLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Changchun Engley Automobile IndustryLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Changchun Engley Automobile IndustryLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥217.4m. And we liked the look of last year's 268% year-on-year EBIT growth. So we are not troubled with Changchun Engley Automobile IndustryLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Changchun Engley Automobile IndustryLtd is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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.

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