We Think Advanced Technology & Materials (SZSE:000969) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Advanced Technology & Materials Co., Ltd. (SZSE:000969) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Advanced Technology & Materials

What Is Advanced Technology & Materials's Net Debt?

The chart below, which you can click on for greater detail, shows that Advanced Technology & Materials had CN¥820.9m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥2.13b in cash, so it actually has CN¥1.30b net cash.

A Look At Advanced Technology & Materials' Liabilities

We can see from the most recent balance sheet that Advanced Technology & Materials had liabilities of CN¥3.45b falling due within a year, and liabilities of CN¥878.6m due beyond that. Offsetting these obligations, it had cash of CN¥2.13b as well as receivables valued at CN¥1.71b due within 12 months. So its liabilities total CN¥493.1m more than the combination of its cash and short-term receivables.

Given Advanced Technology & Materials has a market capitalization of CN¥8.80b, it's hard to believe these liabilities pose much 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, Advanced Technology & Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Advanced Technology & Materials has increased its EBIT by 6.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Advanced Technology & Materials's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Advanced Technology & Materials 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. 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¥1.30b in net cash. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in CN¥372m. 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. However, not all investment risk resides within the balance sheet - far from it. For example - Advanced Technology & Materials has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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

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.