Does Allwinner TechnologyLtd (SZSE:300458) Have A Healthy Balance Sheet?

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 Allwinner Technology Co.,Ltd. (SZSE:300458) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Allwinner TechnologyLtd

What Is Allwinner TechnologyLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Allwinner TechnologyLtd had CN¥202.3m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥1.83b in cash, leading to a CN¥1.63b net cash position.

A Look At Allwinner TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Allwinner TechnologyLtd had liabilities of CN¥646.6m due within 12 months and liabilities of CN¥46.5m due beyond that. Offsetting this, it had CN¥1.83b in cash and CN¥56.1m in receivables that were due within 12 months. So it actually has CN¥1.20b more liquid assets than total liabilities.

This surplus suggests that Allwinner TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Allwinner TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Allwinner TechnologyLtd turned things around in the last 12 months, delivering and EBIT of CN¥85m. 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 Allwinner TechnologyLtd'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. While Allwinner TechnologyLtd 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. During the last year, Allwinner TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Allwinner TechnologyLtd has net cash of CN¥1.63b, as well as more liquid assets than liabilities. So we are not troubled with Allwinner TechnologyLtd's debt use. 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 instance, we've identified 2 warning signs for Allwinner TechnologyLtd (1 shouldn't be ignored) 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.

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.