Is IAT Automobile Technology (SZSE:300825) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that IAT Automobile Technology Co., Ltd. (SZSE:300825) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for IAT Automobile Technology

What Is IAT Automobile Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 IAT Automobile Technology had CN¥152.8m of debt, an increase on CN¥97.9m, over one year. But it also has CN¥394.3m in cash to offset that, meaning it has CN¥241.5m net cash.

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¥428.1m due within 12 months and liabilities of CN¥394.8m due beyond that. Offsetting this, it had CN¥394.3m in cash and CN¥441.2m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to IAT Automobile Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.77b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, IAT Automobile Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IAT Automobile 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.

Over 12 months, IAT Automobile Technology made a loss at the EBIT level, and saw its revenue drop to CN¥754m, which is a fall of 19%. We would much prefer see growth.

So How Risky Is IAT Automobile Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year IAT Automobile Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥304m and booked a CN¥46m accounting loss. With only CN¥241.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for IAT Automobile Technology you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.