Allwinnertech TechnologyLtd (SZSE:300458) Could Easily Take On More Debt

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.' 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. As with many other companies Allwinnertech Technology Co.,Ltd. (SZSE:300458) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Allwinnertech TechnologyLtd

What Is Allwinnertech TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Allwinnertech TechnologyLtd had debt of CN¥251.2m, up from CN¥129.4m in one year. But it also has CN¥2.02b in cash to offset that, meaning it has CN¥1.76b net cash.

A Look At Allwinnertech TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Allwinnertech TechnologyLtd had liabilities of CN¥627.1m falling due within a year, and liabilities of CN¥53.0m due beyond that. On the other hand, it had cash of CN¥2.02b and CN¥64.2m worth of receivables due within a year. So it actually has CN¥1.40b more liquid assets than total liabilities.

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

Although Allwinnertech TechnologyLtd 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Allwinnertech TechnologyLtd'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Allwinnertech 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. Over the last year, Allwinnertech TechnologyLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Allwinnertech TechnologyLtd has net cash of CN¥1.76b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥125m, being 243% of its EBIT. So is Allwinnertech TechnologyLtd'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. Case in point: We've spotted 2 warning signs for Allwinnertech TechnologyLtd you should be aware of, and 1 of them is potentially serious.

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.