Is Aotecar New Energy Technology (SZSE:002239) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Aotecar New Energy Technology Co., Ltd. (SZSE:002239) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aotecar New Energy Technology

What Is Aotecar New Energy Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Aotecar New Energy Technology had CN¥2.02b of debt, an increase on CN¥1.68b, over one year. But it also has CN¥2.12b in cash to offset that, meaning it has CN¥105.3m net cash.

How Healthy Is Aotecar New Energy Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aotecar New Energy Technology had liabilities of CN¥6.40b due within 12 months and liabilities of CN¥500.6m due beyond that. Offsetting these obligations, it had cash of CN¥2.12b as well as receivables valued at CN¥3.03b due within 12 months. So its liabilities total CN¥1.74b more than the combination of its cash and short-term receivables.

Aotecar New Energy Technology has a market capitalization of CN¥7.49b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aotecar New Energy Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Aotecar New Energy Technology's saving grace is its low debt levels, because its EBIT has tanked 76% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aotecar New Energy Technology will need earnings to service that debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Aotecar New Energy 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 two years, Aotecar New Energy 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

While Aotecar New Energy Technology does have more liabilities than liquid assets, it also has net cash of CN¥105.3m. So while Aotecar New Energy Technology does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Aotecar New Energy Technology you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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