CRRC (SHSE:601766) Could Easily Take On More Debt

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 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 note that CRRC Corporation Limited (SHSE:601766) 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CRRC

What Is CRRC's Debt?

The image below, which you can click on for greater detail, shows that CRRC had debt of CN¥15.6b at the end of March 2024, a reduction from CN¥19.7b over a year. But it also has CN¥75.7b in cash to offset that, meaning it has CN¥60.1b net cash.

How Healthy Is CRRC's Balance Sheet?

The latest balance sheet data shows that CRRC had liabilities of CN¥248.5b due within a year, and liabilities of CN¥25.1b falling due after that. Offsetting this, it had CN¥75.7b in cash and CN¥138.8b in receivables that were due within 12 months. So it has liabilities totalling CN¥59.0b more than its cash and near-term receivables, combined.

This deficit isn't so bad because CRRC is worth a massive CN¥205.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, CRRC also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that CRRC grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CRRC's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While CRRC 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. Over the last three years, CRRC actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although CRRC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥60.1b. The cherry on top was that in converted 179% of that EBIT to free cash flow, bringing in CN¥29b. So we don't think CRRC's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CRRC you should know about.

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.

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