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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 China National Electric Apparatus Research Institute Co., Ltd. (SHSE:688128) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China National Electric Apparatus Research Institute

What Is China National Electric Apparatus Research Institute's Debt?

The image below, which you can click on for greater detail, shows that China National Electric Apparatus Research Institute had debt of CN¥16.7m at the end of June 2024, a reduction from CN¥28.0m over a year. However, it does have CN¥1.19b in cash offsetting this, leading to net cash of CN¥1.17b.

A Look At China National Electric Apparatus Research Institute's Liabilities

According to the last reported balance sheet, China National Electric Apparatus Research Institute had liabilities of CN¥3.76b due within 12 months, and liabilities of CN¥196.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.19b as well as receivables valued at CN¥1.78b due within 12 months. So its liabilities total CN¥986.3m more than the combination of its cash and short-term receivables.

Given China National Electric Apparatus Research Institute has a market capitalization of CN¥6.62b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, China National Electric Apparatus Research Institute also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that China National Electric Apparatus Research Institute has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China National Electric Apparatus Research Institute's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 52% 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

Although China National Electric Apparatus Research Institute'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¥1.17b. And it impressed us with its EBIT growth of 20% over the last year. So we don't think China National Electric Apparatus Research Institute'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. Be aware that China National Electric Apparatus Research Institute is showing 1 warning sign in our investment analysis , 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.