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.' 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, Miracle Automation Engineering Co.Ltd (SZSE:002009) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

What Is Miracle Automation EngineeringLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Miracle Automation EngineeringLtd had CN¥2.29b in debt in June 2024; about the same as the year before. On the flip side, it has CN¥842.1m in cash leading to net debt of about CN¥1.44b.

How Strong Is Miracle Automation EngineeringLtd's Balance Sheet?

The latest balance sheet data shows that Miracle Automation EngineeringLtd had liabilities of CN¥3.69b due within a year, and liabilities of CN¥467.7m falling due after that. On the other hand, it had cash of CN¥842.1m and CN¥1.96b worth of receivables due within a year. So it has liabilities totalling CN¥1.35b more than its cash and near-term receivables, combined.

Miracle Automation EngineeringLtd has a market capitalization of CN¥4.53b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Miracle Automation EngineeringLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Miracle Automation EngineeringLtd had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥3.2b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Miracle Automation EngineeringLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥178m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥171m of cash over the last year. So to be blunt we think it is risky. 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 2 warning signs for Miracle Automation EngineeringLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.