Is Camelot Electronics TechnologyLtd (SZSE:301282) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Camelot Electronics Technology Co.,Ltd. (SZSE:301282) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Camelot Electronics TechnologyLtd

What Is Camelot Electronics TechnologyLtd's Debt?

The chart below, which you can click on for greater detail, shows that Camelot Electronics TechnologyLtd had CN¥158.1m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥580.0m in cash, so it actually has CN¥421.9m net cash.

How Healthy Is Camelot Electronics TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Camelot Electronics TechnologyLtd had liabilities of CN¥930.6m due within a year, and liabilities of CN¥94.4m falling due after that. Offsetting this, it had CN¥580.0m in cash and CN¥696.7m in receivables that were due within 12 months. So it actually has CN¥251.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Camelot Electronics TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Camelot Electronics TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Camelot Electronics TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 84% 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 you can't view debt in total isolation; since Camelot Electronics TechnologyLtd will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Camelot Electronics TechnologyLtd 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. During the last three years, Camelot Electronics TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Camelot Electronics TechnologyLtd has net cash of CN¥421.9m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Camelot Electronics TechnologyLtd's balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Camelot Electronics TechnologyLtd (of which 2 are a bit concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.