We Think Changshu Tianyin ElectromechanicalLtd (SZSE:300342) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 can see that Changshu Tianyin Electromechanical Co.,Ltd (SZSE:300342) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

View our latest analysis for Changshu Tianyin ElectromechanicalLtd

What Is Changshu Tianyin ElectromechanicalLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Changshu Tianyin ElectromechanicalLtd had CN¥57.8m of debt, an increase on CN¥51.1m, over one year. However, it does have CN¥203.9m in cash offsetting this, leading to net cash of CN¥146.1m.

A Look At Changshu Tianyin ElectromechanicalLtd's Liabilities

According to the last reported balance sheet, Changshu Tianyin ElectromechanicalLtd had liabilities of CN¥645.3m due within 12 months, and liabilities of CN¥33.0m due beyond 12 months. On the other hand, it had cash of CN¥203.9m and CN¥797.4m worth of receivables due within a year. So it can boast CN¥323.0m 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. Simply put, the fact that Changshu Tianyin ElectromechanicalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Changshu Tianyin ElectromechanicalLtd grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Changshu Tianyin ElectromechanicalLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changshu Tianyin ElectromechanicalLtd has net cash of CN¥146.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥102m, being 148% of its EBIT. 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. Case in point: We've spotted 4 warning signs for Changshu Tianyin ElectromechanicalLtd you should be aware of, and 2 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.