Here's Why Eaglerise Electric & Electronic (China) (SZSE:002922) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Eaglerise Electric & Electronic (China) Co., Ltd (SZSE:002922) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Eaglerise Electric & Electronic (China)

What Is Eaglerise Electric & Electronic (China)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Eaglerise Electric & Electronic (China) had CN¥918.0m of debt, an increase on CN¥489.3m, over one year. But on the other hand it also has CN¥1.33b in cash, leading to a CN¥410.0m net cash position.

How Strong Is Eaglerise Electric & Electronic (China)'s Balance Sheet?

We can see from the most recent balance sheet that Eaglerise Electric & Electronic (China) had liabilities of CN¥2.06b falling due within a year, and liabilities of CN¥351.9m due beyond that. On the other hand, it had cash of CN¥1.33b and CN¥1.57b worth of receivables due within a year. So it actually has CN¥486.2m more liquid assets than total liabilities.

This surplus suggests that Eaglerise Electric & Electronic (China) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Eaglerise Electric & Electronic (China) has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Eaglerise Electric & Electronic (China) grew its EBIT by 102% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eaglerise Electric & Electronic (China) 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 Eaglerise Electric & Electronic (China) 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, Eaglerise Electric & Electronic (China) 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

While we empathize with investors who find debt concerning, you should keep in mind that Eaglerise Electric & Electronic (China) has net cash of CN¥410.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 102% over the last year. So we are not troubled with Eaglerise Electric & Electronic (China)'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 instance, we've identified 3 warning signs for Eaglerise Electric & Electronic (China) (1 is significant) you should be aware of.

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.