Does Changchun Engley Automobile IndustryLtd (SHSE:601279) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Changchun Engley Automobile Industry Co.,Ltd. (SHSE:601279) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Changchun Engley Automobile IndustryLtd

How Much Debt Does Changchun Engley Automobile IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that Changchun Engley Automobile IndustryLtd had debt of CN¥1.13b at the end of September 2024, a reduction from CN¥1.51b over a year. However, its balance sheet shows it holds CN¥1.39b in cash, so it actually has CN¥255.2m net cash.

A Look At Changchun Engley Automobile IndustryLtd's Liabilities

We can see from the most recent balance sheet that Changchun Engley Automobile IndustryLtd had liabilities of CN¥2.21b falling due within a year, and liabilities of CN¥859.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.39b as well as receivables valued at CN¥1.09b due within 12 months. So it has liabilities totalling CN¥596.6m more than its cash and near-term receivables, combined.

Of course, Changchun Engley Automobile IndustryLtd has a market capitalization of CN¥6.72b, 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. Despite its noteworthy liabilities, Changchun Engley Automobile IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw Changchun Engley Automobile IndustryLtd grow its EBIT by 5.1% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Changchun Engley Automobile IndustryLtd burned a lot of cash. 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¥255.2m. On top of that, it increased its EBIT by 5.1% in the last twelve months. So we don't have any problem with Changchun Engley Automobile IndustryLtd's use of debt. 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 instance, we've identified 3 warning signs for Changchun Engley Automobile IndustryLtd (1 shouldn't be ignored) you should be aware of.

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.

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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.