Does Contemporary Amperex Technology (SZSE:300750) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Contemporary Amperex Technology Co., Limited (SZSE:300750) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Contemporary Amperex Technology

What Is Contemporary Amperex Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Contemporary Amperex Technology had debt of CN¥128.9b, up from CN¥121.1b in one year. However, its balance sheet shows it holds CN¥286.7b in cash, so it actually has CN¥157.8b net cash.

A Look At Contemporary Amperex Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Contemporary Amperex Technology had liabilities of CN¥281.1b due within 12 months and liabilities of CN¥193.9b due beyond that. On the other hand, it had cash of CN¥286.7b and CN¥111.4b worth of receivables due within a year. So it has liabilities totalling CN¥76.8b more than its cash and near-term receivables, combined.

Of course, Contemporary Amperex Technology has a titanic market capitalization of CN¥1.13t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Contemporary Amperex Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Contemporary Amperex Technology has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Contemporary Amperex Technology 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. During the last three years, Contemporary Amperex Technology generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Contemporary Amperex Technology has CN¥157.8b in net cash. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in CN¥80b. So is Contemporary Amperex Technology's debt a risk? It doesn't seem so to us. 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. Be aware that Contemporary Amperex Technology is showing 1 warning sign in our investment analysis , you should know about...

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.