These 4 Measures Indicate That Eaglerise Electric & Electronic (China) (SZSE:002922) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Eaglerise Electric & Electronic (China) Co., Ltd (SZSE:002922) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Eaglerise Electric & Electronic (China)

How Much Debt Does Eaglerise Electric & Electronic (China) Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Eaglerise Electric & Electronic (China) had debt of CN¥1.15b, up from CN¥759.3m in one year. However, its balance sheet shows it holds CN¥1.39b in cash, so it actually has CN¥244.6m net cash.

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

Zooming in on the latest balance sheet data, we can see that Eaglerise Electric & Electronic (China) had liabilities of CN¥2.69b due within 12 months and liabilities of CN¥450.3m due beyond that. On the other hand, it had cash of CN¥1.39b and CN¥1.86b worth of receivables due within a year. So it can boast CN¥109.7m more liquid assets than total liabilities.

This state of affairs indicates that Eaglerise Electric & Electronic (China)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥6.98b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

Better yet, Eaglerise Electric & Electronic (China) grew its EBIT by 136% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eaglerise Electric & Electronic (China)'s ability to maintain a healthy balance sheet going forward. 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. Eaglerise Electric & Electronic (China) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Eaglerise Electric & Electronic (China) saw substantial negative free cash flow, in total. 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 it is always sensible to investigate a company's debt, in this case Eaglerise Electric & Electronic (China) has CN¥244.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 136% year-on-year EBIT growth. So we are not troubled with Eaglerise Electric & Electronic (China)'s debt use. 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. For example Eaglerise Electric & Electronic (China) has 3 warning signs (and 1 which is concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.