Chongqing Chuanyi Automation (SHSE:603100) Has A Rock Solid 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.' 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. Importantly, Chongqing Chuanyi Automation Co., Ltd. (SHSE:603100) does carry debt. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chongqing Chuanyi Automation

What Is Chongqing Chuanyi Automation's Debt?

You can click the graphic below for the historical numbers, but it shows that Chongqing Chuanyi Automation had CN¥345.1m of debt in September 2024, down from CN¥525.8m, one year before. But on the other hand it also has CN¥2.18b in cash, leading to a CN¥1.83b net cash position.

A Look At Chongqing Chuanyi Automation's Liabilities

We can see from the most recent balance sheet that Chongqing Chuanyi Automation had liabilities of CN¥3.76b falling due within a year, and liabilities of CN¥269.9m due beyond that. Offsetting these obligations, it had cash of CN¥2.18b as well as receivables valued at CN¥2.91b due within 12 months. So it actually has CN¥1.06b more liquid assets than total liabilities.

This short term liquidity is a sign that Chongqing Chuanyi Automation could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Chongqing Chuanyi Automation boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Chongqing Chuanyi Automation grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 Chongqing Chuanyi Automation'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Chongqing Chuanyi Automation 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 most recent three years, Chongqing Chuanyi Automation recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chongqing Chuanyi Automation has CN¥1.83b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥331m, being 75% of its EBIT. So we don't think Chongqing Chuanyi Automation's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Chongqing Chuanyi Automation, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.