Is Runa Smart Equipment (SZSE:301129) 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.' 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 note that Runa Smart Equipment Co., Ltd. (SZSE:301129) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Runa Smart Equipment

What Is Runa Smart Equipment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Runa Smart Equipment had CN¥117.1m of debt, an increase on none, over one year. However, it does have CN¥478.9m in cash offsetting this, leading to net cash of CN¥361.8m.

How Strong Is Runa Smart Equipment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Runa Smart Equipment had liabilities of CN¥326.1m due within 12 months and liabilities of CN¥6.50m due beyond that. Offsetting these obligations, it had cash of CN¥478.9m as well as receivables valued at CN¥498.7m due within 12 months. So it can boast CN¥645.0m more liquid assets than total liabilities.

It's good to see that Runa Smart Equipment has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Runa Smart Equipment has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Runa Smart Equipment's saving grace is its low debt levels, because its EBIT has tanked 94% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Runa Smart Equipment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Runa Smart Equipment 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, Runa Smart Equipment saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Runa Smart Equipment has CN¥361.8m in net cash and a decent-looking balance sheet. So we are not troubled with Runa Smart Equipment's debt use. 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. We've identified 3 warning signs with Runa Smart Equipment (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.

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