Is Advanced Technology & Materials (SZSE:000969) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Advanced Technology & Materials Co., Ltd. (SZSE:000969) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Advanced Technology & Materials

How Much Debt Does Advanced Technology & Materials Carry?

As you can see below, Advanced Technology & Materials had CN¥809.3m of debt at March 2024, down from CN¥962.7m a year prior. But on the other hand it also has CN¥2.30b in cash, leading to a CN¥1.49b net cash position.

How Strong Is Advanced Technology & Materials' Balance Sheet?

The latest balance sheet data shows that Advanced Technology & Materials had liabilities of CN¥3.78b due within a year, and liabilities of CN¥855.6m falling due after that. Offsetting these obligations, it had cash of CN¥2.30b as well as receivables valued at CN¥1.77b due within 12 months. So it has liabilities totalling CN¥564.1m more than its cash and near-term receivables, combined.

Since publicly traded Advanced Technology & Materials shares are worth a total of CN¥8.16b, it seems unlikely that this level of liabilities would be a major threat. 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, Advanced Technology & Materials 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 Advanced Technology & Materials has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Advanced Technology & Materials can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Advanced Technology & Materials 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. Happily for any shareholders, Advanced Technology & Materials actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Advanced Technology & Materials has CN¥1.49b in net cash. And it impressed us with free cash flow of CN¥436m, being 128% of its EBIT. So is Advanced Technology & Materials's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Advanced Technology & Materials that you should be aware of.

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.

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