David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that IAT Automobile Technology Co., Ltd. (SZSE:300825) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does IAT Automobile Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 IAT Automobile Technology had CN¥200.7m of debt, an increase on CN¥49.1m, over one year. However, it does have CN¥512.9m in cash offsetting this, leading to net cash of CN¥312.2m.

How Healthy Is IAT Automobile Technology's Balance Sheet?

The latest balance sheet data shows that IAT Automobile Technology had liabilities of CN¥434.4m due within a year, and liabilities of CN¥398.9m falling due after that. Offsetting these obligations, it had cash of CN¥512.9m as well as receivables valued at CN¥522.1m due within 12 months. So it can boast CN¥201.7m more liquid assets than total liabilities.

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

It is just as well that IAT Automobile Technology's load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine IAT Automobile Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While IAT Automobile Technology 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, IAT Automobile Technology 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 IAT Automobile Technology has net cash of CN¥312.2m, as well as more liquid assets than liabilities. So while IAT Automobile Technology does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for IAT Automobile Technology that you should be aware of before investing here.

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.