Does China High Precision Automation Group (HKG:591) Have A Healthy Balance Sheet?

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.' 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. We can see that China High Precision Automation Group Limited (HKG:591) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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.

What Is China High Precision Automation Group's Debt?

As you can see below, at the end of December 2024, China High Precision Automation Group had CN¥13.6m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.44b in cash, so it actually has CN¥1.43b net cash.

A Look At China High Precision Automation Group's Liabilities

We can see from the most recent balance sheet that China High Precision Automation Group had liabilities of CN¥77.2m falling due within a year, and liabilities of CN¥18.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.44b as well as receivables valued at CN¥80.1m due within 12 months. So it actually has CN¥1.43b more liquid assets than total liabilities.

This excess liquidity is a great indication that China High Precision Automation Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China High Precision Automation Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China High Precision Automation Group'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.

View our latest analysis for China High Precision Automation Group

Over 12 months, China High Precision Automation Group reported revenue of CN¥183m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is China High Precision Automation Group?

Although China High Precision Automation Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥25m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given it also grew revenue by 28% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with China High Precision Automation Group (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.