Here's Why IAT Automobile Technology (SZSE:300825) Has A Meaningful Debt Burden

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. We note that IAT Automobile Technology Co., Ltd. (SZSE:300825) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

As you can see below, at the end of March 2024, IAT Automobile Technology had CN¥200.7m of debt, up from CN¥49.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥512.9m in cash, leading to a CN¥312.2m net cash position.

A Look At IAT Automobile Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that IAT Automobile Technology had liabilities of CN¥434.4m due within 12 months and liabilities of CN¥398.9m due beyond that. On the other hand, it had cash of CN¥512.9m and CN¥522.1m worth of receivables due within a year. So it can boast CN¥201.7m more liquid assets than total liabilities.

This surplus suggests that IAT Automobile Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, IAT Automobile Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that IAT Automobile Technology's EBIT was down 82% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. IAT Automobile 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. During the last three years, IAT Automobile Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that IAT Automobile Technology has net cash of CN¥312.2m, as well as more liquid assets than liabilities. Despite its cash we think that IAT Automobile Technology seems to struggle to grow its EBIT, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - IAT Automobile Technology has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.