We Think Chongqing VDL Electronics (SZSE:301121) Can Stay On Top Of Its Debt

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.' 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. Importantly, Chongqing VDL Electronics Co., Ltd. (SZSE:301121) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chongqing VDL Electronics

What Is Chongqing VDL Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Chongqing VDL Electronics had CN¥577.0m of debt, an increase on CN¥427.5m, over one year. However, it does have CN¥852.2m in cash offsetting this, leading to net cash of CN¥275.2m.

A Look At Chongqing VDL Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that Chongqing VDL Electronics had liabilities of CN¥890.6m due within 12 months and liabilities of CN¥88.4m due beyond that. Offsetting this, it had CN¥852.2m in cash and CN¥414.3m in receivables that were due within 12 months. So it actually has CN¥287.5m more liquid assets than total liabilities.

This surplus suggests that Chongqing VDL Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Chongqing VDL Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Chongqing VDL Electronics made a loss at the EBIT level, last year, it was also good to see that it generated CN¥52m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Chongqing VDL Electronics's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chongqing VDL Electronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Chongqing VDL Electronics saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chongqing VDL Electronics has CN¥275.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Chongqing VDL Electronics'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. Be aware that Chongqing VDL Electronics is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.