Is Changshu Tianyin ElectromechanicalLtd (SZSE:300342) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Changshu Tianyin Electromechanical Co.,Ltd (SZSE:300342) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Changshu Tianyin ElectromechanicalLtd

How Much Debt Does Changshu Tianyin ElectromechanicalLtd Carry?

As you can see below, at the end of September 2024, Changshu Tianyin ElectromechanicalLtd had CN¥52.7m of debt, up from CN¥38.5m a year ago. Click the image for more detail. But it also has CN¥209.2m in cash to offset that, meaning it has CN¥156.5m net cash.

How Healthy Is Changshu Tianyin ElectromechanicalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Changshu Tianyin ElectromechanicalLtd had liabilities of CN¥628.0m due within 12 months and liabilities of CN¥29.6m due beyond that. Offsetting these obligations, it had cash of CN¥209.2m as well as receivables valued at CN¥803.2m due within 12 months. So it actually has CN¥354.9m more liquid assets than total liabilities.

This surplus suggests that Changshu Tianyin ElectromechanicalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Changshu Tianyin ElectromechanicalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Changshu Tianyin ElectromechanicalLtd grew its EBIT by 128% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Changshu Tianyin ElectromechanicalLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Changshu Tianyin ElectromechanicalLtd 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, Changshu Tianyin ElectromechanicalLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Changshu Tianyin ElectromechanicalLtd has CN¥156.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in CN¥96m. So we don't think Changshu Tianyin ElectromechanicalLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Changshu Tianyin ElectromechanicalLtd has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.