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

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, Autel Intelligent Technology Corp., Ltd. (SHSE:688208) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Autel Intelligent Technology

What Is Autel Intelligent Technology's Debt?

As you can see below, Autel Intelligent Technology had CN¥1.16b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.56b in cash offsetting this, leading to net cash of CN¥396.6m.

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¥1.12b due within 12 months and liabilities of CN¥1.55b due beyond that. Offsetting this, it had CN¥1.56b in cash and CN¥824.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥288.0m.

This state of affairs indicates that Autel Intelligent Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥16.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Autel Intelligent Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Autel Intelligent Technology grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Autel Intelligent Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Autel Intelligent Technology recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Autel Intelligent Technology has CN¥396.6m in net cash. And it impressed us with its EBIT growth of 88% over the last year. So we don't have any problem with Autel Intelligent Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Autel Intelligent Technology you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.