Health Check: How Prudently Does IAT Automobile Technology (SZSE:300825) Use Debt?

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.' 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. As with many other companies IAT Automobile Technology Co., Ltd. (SZSE:300825) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for IAT Automobile Technology

What Is IAT Automobile Technology's Net Debt?

As you can see below, at the end of September 2024, IAT Automobile Technology had CN¥245.6m of debt, up from CN¥140.5m a year ago. Click the image for more detail. However, it does have CN¥484.8m in cash offsetting this, leading to net cash of CN¥239.2m.

How Healthy Is IAT Automobile Technology's Balance Sheet?

According to the last reported balance sheet, IAT Automobile Technology had liabilities of CN¥435.9m due within 12 months, and liabilities of CN¥401.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥484.8m as well as receivables valued at CN¥330.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥22.4m.

Having regard to IAT Automobile Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.25b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, IAT Automobile Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 IAT Automobile Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year IAT Automobile Technology's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is IAT Automobile Technology?

While IAT Automobile Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥4.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 2 warning signs for IAT Automobile 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.