Is Chongqing Chuanyi Automation (SHSE:603100) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Chongqing Chuanyi Automation Co., Ltd. (SHSE:603100) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Chongqing Chuanyi Automation

What Is Chongqing Chuanyi Automation's Debt?

The image below, which you can click on for greater detail, shows that Chongqing Chuanyi Automation had debt of CN¥350.9m at the end of March 2024, a reduction from CN¥515.2m over a year. But it also has CN¥2.14b in cash to offset that, meaning it has CN¥1.78b net cash.

How Healthy Is Chongqing Chuanyi Automation's Balance Sheet?

According to the last reported balance sheet, Chongqing Chuanyi Automation had liabilities of CN¥3.54b due within 12 months, and liabilities of CN¥417.7m due beyond 12 months. On the other hand, it had cash of CN¥2.14b and CN¥2.63b worth of receivables due within a year. So it can boast CN¥801.0m more liquid assets than total liabilities.

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

Also good is that Chongqing Chuanyi Automation grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Chongqing Chuanyi Automation 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, Chongqing Chuanyi Automation 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 investigate a company's debt, in this case Chongqing Chuanyi Automation has CN¥1.78b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in CN¥310m. So is Chongqing Chuanyi Automation's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Chongqing Chuanyi Automation (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.

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