Is Kinco Automation (Shanghai)Ltd (SHSE:688160) A Risky Investment?

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. Importantly, Kinco Automation (Shanghai) Co.,Ltd (SHSE:688160) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Kinco Automation (Shanghai)Ltd

What Is Kinco Automation (Shanghai)Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Kinco Automation (Shanghai)Ltd had CN¥122.3m of debt, an increase on CN¥41.6m, over one year. However, its balance sheet shows it holds CN¥348.7m in cash, so it actually has CN¥226.4m net cash.

A Look At Kinco Automation (Shanghai)Ltd's Liabilities

The latest balance sheet data shows that Kinco Automation (Shanghai)Ltd had liabilities of CN¥247.0m due within a year, and liabilities of CN¥18.0m falling due after that. Offsetting these obligations, it had cash of CN¥348.7m as well as receivables valued at CN¥169.1m due within 12 months. So it can boast CN¥252.7m more liquid assets than total liabilities.

This surplus suggests that Kinco Automation (Shanghai)Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kinco Automation (Shanghai)Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

While Kinco Automation (Shanghai)Ltd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kinco Automation (Shanghai)Ltd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Kinco Automation (Shanghai)Ltd 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. Over the last three years, Kinco Automation (Shanghai)Ltd recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kinco Automation (Shanghai)Ltd has net cash of CN¥226.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥37m, being 91% of its EBIT. So is Kinco Automation (Shanghai)Ltd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Kinco Automation (Shanghai)Ltd that you should be aware of.

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.