Does China Automotive Interior Decoration Holdings (HKG:48) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, China Automotive Interior Decoration Holdings Limited (HKG:48) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Automotive Interior Decoration Holdings

What Is China Automotive Interior Decoration Holdings's Debt?

As you can see below, China Automotive Interior Decoration Holdings had CN¥30.0m of debt at June 2021, down from CN¥40.0m a year prior. But it also has CN¥63.3m in cash to offset that, meaning it has CN¥33.3m net cash.

How Strong Is China Automotive Interior Decoration Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Automotive Interior Decoration Holdings had liabilities of CN¥141.4m falling due within a year, and liabilities of CN¥2.70m due beyond that. On the other hand, it had cash of CN¥63.3m and CN¥134.1m worth of receivables due within a year. So it actually has CN¥53.3m more liquid assets than total liabilities.

This surplus strongly suggests that China Automotive Interior Decoration Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, China Automotive Interior Decoration Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Automotive Interior Decoration Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Automotive Interior Decoration Holdings had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥166m. That's not what we would hope to see.

So How Risky Is China Automotive Interior Decoration Holdings?

Although China Automotive Interior Decoration Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥2.4m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 China Automotive Interior Decoration Holdings (of which 1 doesn't sit too well with us!) 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.
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