Here's Why Autel Intelligent Technology (SHSE:688208) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Autel Intelligent Technology Corp., Ltd. (SHSE:688208) makes use of 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Autel Intelligent Technology

What Is Autel Intelligent Technology's Net Debt?

As you can see below, Autel Intelligent Technology had CN¥1.16b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.64b in cash offsetting this, leading to net cash of CN¥479.0m.

How Healthy Is Autel Intelligent Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Autel Intelligent Technology had liabilities of CN¥1.20b due within 12 months and liabilities of CN¥1.54b due beyond that. On the other hand, it had cash of CN¥1.64b and CN¥804.1m worth of receivables due within a year. So it has liabilities totalling CN¥301.0m more than its cash and near-term receivables, combined.

Of course, Autel Intelligent Technology has a market capitalization of CN¥11.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Autel Intelligent Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Autel Intelligent Technology grew its EBIT by 110% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Autel Intelligent Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Autel Intelligent Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Autel Intelligent Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Autel Intelligent Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥479.0m. And it impressed us with its EBIT growth of 110% over the last year. So we are not troubled with Autel Intelligent Technology'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. Case in point: We've spotted 2 warning signs for Autel Intelligent Technology 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.

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.