Does Autostreets Development (HKG:2443) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Autostreets Development Limited (HKG:2443) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

What Is Autostreets Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Autostreets Development had CN¥129.5m of debt in December 2024, down from CN¥441.9m, one year before. But it also has CN¥1.05b in cash to offset that, meaning it has CN¥920.4m net cash.

How Healthy Is Autostreets Development's Balance Sheet?

According to the last reported balance sheet, Autostreets Development had liabilities of CN¥262.3m due within 12 months, and liabilities of CN¥50.4m due beyond 12 months. Offsetting this, it had CN¥1.05b in cash and CN¥14.7m in receivables that were due within 12 months. So it can boast CN¥751.9m more liquid assets than total liabilities.

This excess liquidity suggests that Autostreets Development is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Autostreets Development has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Autostreets Development

The modesty of its debt load may become crucial for Autostreets Development if management cannot prevent a repeat of the 54% cut to EBIT over the last year. 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 you can't view debt in total isolation; since Autostreets Development 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Autostreets Development 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. Over the last three years, Autostreets Development 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 it is always sensible to investigate a company's debt, in this case Autostreets Development has CN¥920.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥7.2m, being 91% of its EBIT. So we don't think Autostreets Development's use of debt is risky. 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 Autostreets Development has 2 warning signs (and 1 which shouldn't be ignored) 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.