These 4 Measures Indicate That Sichuan Injet Electric (SZSE:300820) Is Using Debt Reasonably Well

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.' 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 Sichuan Injet Electric Co., Ltd. (SZSE:300820) makes use of debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sichuan Injet Electric

What Is Sichuan Injet Electric's Net Debt?

As you can see below, Sichuan Injet Electric had CN¥20.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥596.0m in cash, leading to a CN¥576.0m net cash position.

A Look At Sichuan Injet Electric's Liabilities

The latest balance sheet data shows that Sichuan Injet Electric had liabilities of CN¥1.91b due within a year, and liabilities of CN¥25.1m falling due after that. On the other hand, it had cash of CN¥596.0m and CN¥763.1m worth of receivables due within a year. So its liabilities total CN¥576.9m more than the combination of its cash and short-term receivables.

Of course, Sichuan Injet Electric has a market capitalization of CN¥9.76b, 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. While it does have liabilities worth noting, Sichuan Injet Electric also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Sichuan Injet Electric has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sichuan Injet Electric's ability to maintain a healthy balance sheet going forward. 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. 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. During the last three years, Sichuan Injet Electric burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sichuan Injet Electric has CN¥576.0m in net cash. And we liked the look of last year's 67% year-on-year EBIT growth. So we don't have any problem with Sichuan Injet Electric's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Sichuan Injet Electric you should be aware of, and 1 of them can't be ignored.

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.