Contemporary Amperex Technology (SZSE:300750) Has A Rock Solid Balance Sheet

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. We can see that Contemporary Amperex Technology Co., Limited (SZSE:300750) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Contemporary Amperex Technology

What Is Contemporary Amperex Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Contemporary Amperex Technology had debt of CN¥132.5b, up from CN¥106.2b in one year. But on the other hand it also has CN¥288.7b in cash, leading to a CN¥156.3b net cash position.

How Healthy Is Contemporary Amperex Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Contemporary Amperex Technology had liabilities of CN¥279.0b due within 12 months and liabilities of CN¥221.9b due beyond that. Offsetting this, it had CN¥288.7b in cash and CN¥112.0b in receivables that were due within 12 months. So it has liabilities totalling CN¥100.1b more than its cash and near-term receivables, combined.

Given Contemporary Amperex Technology has a humongous market capitalization of CN¥847.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Contemporary Amperex Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Contemporary Amperex Technology grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Contemporary Amperex Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Contemporary Amperex Technology 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. Over the last three years, Contemporary Amperex Technology recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Contemporary Amperex Technology does have more liabilities than liquid assets, it also has net cash of CN¥156.3b. And it impressed us with free cash flow of CN¥70b, being 90% of its EBIT. So we don't think Contemporary Amperex Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Contemporary Amperex Technology that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.