Here's Why Sichuan Injet Electric (SZSE:300820) Can Manage Its Debt Responsibly

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.' 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 Sichuan Injet Electric Co., Ltd. (SZSE:300820) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sichuan Injet Electric

What Is Sichuan Injet Electric's Net Debt?

The chart below, which you can click on for greater detail, shows that Sichuan Injet Electric had CN¥20.0m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥951.4m in cash, so it actually has CN¥931.4m net cash.

A Look At Sichuan Injet Electric's Liabilities

Zooming in on the latest balance sheet data, we can see that Sichuan Injet Electric had liabilities of CN¥1.52b due within 12 months and liabilities of CN¥39.9m due beyond that. On the other hand, it had cash of CN¥951.4m and CN¥659.4m worth of receivables due within a year. So it can boast CN¥48.6m more liquid assets than total liabilities.

Having regard to Sichuan Injet Electric's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥12.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Sichuan Injet Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Sichuan Injet Electric grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sichuan Injet Electric 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sichuan Injet Electric 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. In the last three years, Sichuan Injet Electric's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sichuan Injet Electric has CN¥931.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 15% year-on-year EBIT growth. So we are not troubled with Sichuan Injet Electric's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sichuan Injet Electric is showing 1 warning sign in our investment analysis , you should know about...

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.