We Think China CAMC Engineering (SZSE:002051) Can Stay On Top Of Its Debt

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 CAMC Engineering Co., Ltd. (SZSE:002051) does use debt in its business. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China CAMC Engineering

What Is China CAMC Engineering's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China CAMC Engineering had CN¥953.2m of debt in September 2024, down from CN¥1.13b, one year before. But it also has CN¥5.19b in cash to offset that, meaning it has CN¥4.24b net cash.

How Healthy Is China CAMC Engineering's Balance Sheet?

According to the last reported balance sheet, China CAMC Engineering had liabilities of CN¥10.9b due within 12 months, and liabilities of CN¥974.8m due beyond 12 months. On the other hand, it had cash of CN¥5.19b and CN¥6.39b worth of receivables due within a year. So it has liabilities totalling CN¥302.4m more than its cash and near-term receivables, combined.

Given China CAMC Engineering has a market capitalization of CN¥9.08b, it's hard to believe these liabilities pose much threat. 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 CAMC Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that China CAMC Engineering grew its EBIT by 101% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if China CAMC Engineering 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 company can only pay off debt with cold hard cash, not accounting profits. While China CAMC Engineering 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 CAMC Engineering burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about China CAMC Engineering's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.24b. And it impressed us with its EBIT growth of 101% over the last year. So we are not troubled with China CAMC Engineering's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for China CAMC Engineering that you should be aware of before investing here.

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.