We Think Chengdu RML Technology (SZSE:301050) Can Manage Its Debt With Ease

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. As with many other companies Chengdu RML Technology Co., Ltd. (SZSE:301050) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Chengdu RML Technology

What Is Chengdu RML Technology's Net Debt?

As you can see below, Chengdu RML Technology had CN¥30.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.70b in cash offsetting this, leading to net cash of CN¥1.67b.

A Look At Chengdu RML Technology's Liabilities

We can see from the most recent balance sheet that Chengdu RML Technology had liabilities of CN¥724.5m falling due within a year, and liabilities of CN¥32.1m due beyond that. On the other hand, it had cash of CN¥1.70b and CN¥327.3m worth of receivables due within a year. So it actually has CN¥1.27b more liquid assets than total liabilities.

This short term liquidity is a sign that Chengdu RML Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Chengdu RML Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Chengdu RML Technology grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its 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 Chengdu RML Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Chengdu RML 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. Looking at the most recent three years, Chengdu RML Technology recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chengdu RML Technology has net cash of CN¥1.67b, as well as more liquid assets than liabilities. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think Chengdu RML Technology's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Chengdu RML Technology's earnings per share history for free.

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.