We Think Kinco Automation (Shanghai)Ltd (SHSE:688160) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kinco Automation (Shanghai)Ltd

How Much Debt Does Kinco Automation (Shanghai)Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Kinco Automation (Shanghai)Ltd had CN¥100.0m of debt, an increase on CN¥30.0m, over one year. But on the other hand it also has CN¥348.7m in cash, leading to a CN¥248.7m net cash position.

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 this, it had CN¥348.7m in cash and CN¥169.1m in receivables that were due within 12 months. So it can boast CN¥252.7m more liquid assets than total liabilities.

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

In fact Kinco Automation (Shanghai)Ltd's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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 93% 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¥248.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in CN¥37m. So we are not troubled with Kinco Automation (Shanghai)Ltd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Kinco Automation (Shanghai)Ltd has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.