Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Changshu Tianyin Electromechanical Co.,Ltd (SZSE:300342) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Changshu Tianyin ElectromechanicalLtd Carry?

As you can see below, Changshu Tianyin ElectromechanicalLtd had CN¥35.5m of debt at March 2024, down from CN¥108.7m a year prior. But it also has CN¥178.0m in cash to offset that, meaning it has CN¥142.5m net cash.

A Look At Changshu Tianyin ElectromechanicalLtd's Liabilities

The latest balance sheet data shows that Changshu Tianyin ElectromechanicalLtd had liabilities of CN¥605.2m due within a year, and liabilities of CN¥13.4m falling due after that. Offsetting these obligations, it had cash of CN¥178.0m as well as receivables valued at CN¥744.7m due within 12 months. So it actually has CN¥304.1m more liquid assets than total liabilities.

This surplus suggests that Changshu Tianyin ElectromechanicalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Changshu Tianyin ElectromechanicalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Changshu Tianyin ElectromechanicalLtd has increased its EBIT by 9.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Changshu Tianyin ElectromechanicalLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Changshu Tianyin ElectromechanicalLtd 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, Changshu Tianyin ElectromechanicalLtd recorded free cash flow worth a fulsome 93% 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 we empathize with investors who find debt concerning, you should keep in mind that Changshu Tianyin ElectromechanicalLtd has net cash of CN¥142.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in CN¥119m. So is Changshu Tianyin ElectromechanicalLtd's debt a risk? It doesn't seem so to us. 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 Changshu Tianyin ElectromechanicalLtd has 5 warning signs (and 2 which make us uncomfortable) we think 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.

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