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.' 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. As with many other companies IAT Automobile Technology Co., Ltd. (SZSE:300825) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 IAT Automobile Technology Carry?

The image below, which you can click on for greater detail, shows that at June 2024 IAT Automobile Technology had debt of CN¥152.8m, up from CN¥97.9m in one year. But it also has CN¥394.3m in cash to offset that, meaning it has CN¥241.5m net cash.

A Look At IAT Automobile Technology's Liabilities

We can see from the most recent balance sheet that IAT Automobile Technology had liabilities of CN¥428.1m falling due within a year, and liabilities of CN¥394.8m due beyond that. Offsetting these obligations, it had cash of CN¥394.3m as well as receivables valued at CN¥441.2m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that IAT Automobile Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥5.40b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, IAT Automobile Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if IAT Automobile Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, IAT Automobile Technology made a loss at the EBIT level, and saw its revenue drop to CN¥754m, which is a fall of 19%. We would much prefer see growth.

So How Risky Is IAT Automobile Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months IAT Automobile Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥304m and booked a CN¥46m accounting loss. Given it only has net cash of CN¥241.5m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 1 warning sign for IAT Automobile Technology that you should be aware of.

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.

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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.