Is China National Electric Apparatus Research Institute (SHSE:688128) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies China National Electric Apparatus Research Institute Co., Ltd. (SHSE:688128) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China National Electric Apparatus Research Institute

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

You can click the graphic below for the historical numbers, but it shows that as of September 2024 China National Electric Apparatus Research Institute had CN¥86.6m of debt, an increase on CN¥11.5m, over one year. But it also has CN¥869.8m in cash to offset that, meaning it has CN¥783.3m net cash.

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

The latest balance sheet data shows that China National Electric Apparatus Research Institute had liabilities of CN¥3.84b due within a year, and liabilities of CN¥189.6m falling due after that. Offsetting this, it had CN¥869.8m in cash and CN¥1.86b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.30b.

Of course, China National Electric Apparatus Research Institute has a market capitalization of CN¥9.16b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

In addition to that, we're happy to report that China National Electric Apparatus Research Institute has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China National Electric Apparatus Research Institute will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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 generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While China National Electric Apparatus Research Institute does have more liabilities than liquid assets, it also has net cash of CN¥783.3m. And it impressed us with free cash flow of CN¥294m, being 82% of its EBIT. So is China National Electric Apparatus Research Institute's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in China National Electric Apparatus Research Institute, you may well want to click here to check an interactive graph of its earnings per share history.

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.