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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Sichuan Injet Electric Co., Ltd. (SZSE:300820) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 June 2024; about the same as the year before. However, it does have CN¥902.8m in cash offsetting this, leading to net cash of CN¥882.8m.

A Look At Sichuan Injet Electric's Liabilities

We can see from the most recent balance sheet that Sichuan Injet Electric had liabilities of CN¥1.72b falling due within a year, and liabilities of CN¥37.6m due beyond that. On the other hand, it had cash of CN¥902.8m and CN¥679.0m worth of receivables due within a year. So its liabilities total CN¥175.0m more than the combination of its cash and short-term receivables.

Since publicly traded Sichuan Injet Electric shares are worth a total of CN¥8.33b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sichuan Injet Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Sichuan Injet Electric has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. 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'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. 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 created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Sichuan Injet Electric's liabilities, but we can be reassured by the fact it has has net cash of CN¥882.8m. And it impressed us with its EBIT growth of 20% over the last year. 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. For instance, we've identified 2 warning signs for Sichuan Injet Electric that you should be aware of.

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.