Does China National Electric Apparatus Research Institute (SHSE:688128) Have A Healthy Balance Sheet?

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.' 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. Importantly, China National Electric Apparatus Research Institute Co., Ltd. (SHSE:688128) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China National Electric Apparatus Research Institute

How Much Debt Does China National Electric Apparatus Research Institute Carry?

As you can see below, at the end of September 2023, China National Electric Apparatus Research Institute had CN¥86.9m of debt, up from CN¥54.9m a year ago. Click the image for more detail. However, it does have CN¥668.4m in cash offsetting this, leading to net cash of CN¥581.5m.

How Strong Is China National Electric Apparatus Research Institute's Balance Sheet?

According to the last reported balance sheet, China National Electric Apparatus Research Institute had liabilities of CN¥4.13b due within 12 months, and liabilities of CN¥231.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥668.4m as well as receivables valued at CN¥1.90b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.80b.

This deficit isn't so bad because China National Electric Apparatus Research Institute is worth CN¥7.58b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, China National Electric Apparatus Research Institute boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, China National Electric Apparatus Research Institute grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China National Electric Apparatus Research Institute 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While China National Electric Apparatus Research Institute 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 three years, China National Electric Apparatus Research Institute produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While China National Electric Apparatus Research Institute does have more liabilities than liquid assets, it also has net cash of CN¥581.5m. And it impressed us with its EBIT growth of 52% over the last year. So we don't think China National Electric Apparatus Research Institute's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for China National Electric Apparatus Research Institute you should know about.

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.