RoboTechnik Intelligent Technology (SZSE:300757) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that RoboTechnik Intelligent Technology Co., LTD (SZSE:300757) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for RoboTechnik Intelligent Technology

What Is RoboTechnik Intelligent Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 RoboTechnik Intelligent Technology had CN¥983.8m of debt, an increase on CN¥648.8m, over one year. However, it does have CN¥246.1m in cash offsetting this, leading to net debt of about CN¥737.8m.

How Healthy Is RoboTechnik Intelligent Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RoboTechnik Intelligent Technology had liabilities of CN¥1.53b due within 12 months and liabilities of CN¥20.0m due beyond that. On the other hand, it had cash of CN¥246.1m and CN¥1.11b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥190.7m.

Having regard to RoboTechnik Intelligent Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥18.1b company is short on cash, but still worth keeping an eye on the balance sheet.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

RoboTechnik Intelligent Technology's net debt is 4.7 times its EBITDA, which is a significant but still reasonable amount of leverage. But its EBIT was about 11.8 times its interest expense, implying the company isn't really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. Importantly, RoboTechnik Intelligent Technology grew its EBIT by 80% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since RoboTechnik Intelligent Technology will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Considering the last two years, RoboTechnik Intelligent Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

RoboTechnik Intelligent Technology's EBIT growth rate was a real positive on this analysis, as was its interest cover. But truth be told its conversion of EBIT to free cash flow had us nibbling our nails. Considering this range of data points, we think RoboTechnik Intelligent Technology is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Case in point: We've spotted 3 warning signs for RoboTechnik Intelligent Technology 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.