Is Chuzhou Duoli Automotive Technology (SZSE:001311) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Chuzhou Duoli Automotive Technology Co., Ltd. (SZSE:001311) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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 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 Chuzhou Duoli Automotive Technology

What Is Chuzhou Duoli Automotive Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chuzhou Duoli Automotive Technology had CN¥111.6m of debt in September 2023, down from CN¥625.0m, one year before. However, it does have CN¥1.26b in cash offsetting this, leading to net cash of CN¥1.15b.

How Strong Is Chuzhou Duoli Automotive Technology's Balance Sheet?

We can see from the most recent balance sheet that Chuzhou Duoli Automotive Technology had liabilities of CN¥960.8m falling due within a year, and liabilities of CN¥115.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.26b as well as receivables valued at CN¥1.30b due within 12 months. So it can boast CN¥1.49b more liquid assets than total liabilities.

This surplus suggests that Chuzhou Duoli Automotive Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Chuzhou Duoli Automotive Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Chuzhou Duoli Automotive Technology grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chuzhou Duoli Automotive Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Chuzhou Duoli Automotive Technology 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, Chuzhou Duoli Automotive Technology 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

While it is always sensible to investigate a company's debt, in this case Chuzhou Duoli Automotive Technology has CN¥1.15b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 13% over the last year. So we are not troubled with Chuzhou Duoli Automotive Technology's debt use. 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. For example, we've discovered 2 warning signs for Chuzhou Duoli Automotive Technology (1 is a bit unpleasant!) that you should be aware of before investing here.

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.