Is Contemporary Amperex Technology (SZSE:300750) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Contemporary Amperex Technology Co., Limited (SZSE:300750) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

View our latest analysis for Contemporary Amperex Technology

How Much Debt Does Contemporary Amperex Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Contemporary Amperex Technology had CN¥133.3b of debt, an increase on CN¥115.1b, over one year. However, it does have CN¥272.3b in cash offsetting this, leading to net cash of CN¥139.0b.

A Look At Contemporary Amperex Technology's Liabilities

We can see from the most recent balance sheet that Contemporary Amperex Technology had liabilities of CN¥270.8b falling due within a year, and liabilities of CN¥224.6b due beyond that. Offsetting this, it had CN¥272.3b in cash and CN¥106.9b in receivables that were due within 12 months. So it has liabilities totalling CN¥116.2b more than its cash and near-term receivables, combined.

Of course, Contemporary Amperex Technology has a titanic market capitalization of CN¥814.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Contemporary Amperex Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Contemporary Amperex Technology grew its EBIT at 19% over the last year, further increasing its ability to manage 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Contemporary Amperex Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥139.0b. And it impressed us with free cash flow of CN¥71b, being 90% of its EBIT. So is Contemporary Amperex Technology's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Contemporary Amperex Technology , and understanding them should be part of your investment process.

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.