Is Xi'an High Voltage Apparatus Research Institute (SHSE:688334) A Risky Investment?

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.' 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 can see that Xi'an High Voltage Apparatus Research Institute Co., Ltd. (SHSE:688334) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Xi'an High Voltage Apparatus Research Institute

What Is Xi'an High Voltage Apparatus Research Institute's Debt?

The image below, which you can click on for greater detail, shows that Xi'an High Voltage Apparatus Research Institute had debt of CN¥20.8m at the end of March 2024, a reduction from CN¥30.8m over a year. But it also has CN¥1.38b in cash to offset that, meaning it has CN¥1.36b net cash.

How Strong Is Xi'an High Voltage Apparatus Research Institute's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xi'an High Voltage Apparatus Research Institute had liabilities of CN¥298.0m due within 12 months and liabilities of CN¥144.6m due beyond that. Offsetting this, it had CN¥1.38b in cash and CN¥149.8m in receivables that were due within 12 months. So it actually has CN¥1.08b more liquid assets than total liabilities.

This surplus suggests that Xi'an High Voltage Apparatus Research Institute is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Xi'an High Voltage Apparatus Research Institute boasts net cash, so it's fair to say it does not have a heavy debt load!

While Xi'an High Voltage Apparatus Research Institute doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is Xi'an High Voltage Apparatus Research Institute'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, a company can only pay off debt with cold hard cash, not accounting profits. Xi'an High Voltage Apparatus Research Institute 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. Over the last three years, Xi'an High Voltage Apparatus Research Institute actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xi'an High Voltage Apparatus Research Institute has CN¥1.36b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in CN¥194m. So we don't think Xi'an High Voltage Apparatus Research Institute's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Xi'an High Voltage Apparatus Research Institute has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com