Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Autel Intelligent Technology Corp., Ltd. (SHSE:688208) does use debt in its business. But the real question is whether this debt is making the company risky.

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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Autel Intelligent Technology Carry?

The chart below, which you can click on for greater detail, shows that Autel Intelligent Technology had CN¥1.16b in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥1.56b in cash, leading to a CN¥396.6m net cash position.

How Strong Is Autel Intelligent Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Autel Intelligent Technology had liabilities of CN¥1.12b due within 12 months and liabilities of CN¥1.55b due beyond that. On the other hand, it had cash of CN¥1.56b and CN¥824.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥288.0m.

Given Autel Intelligent Technology has a market capitalization of CN¥14.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Autel Intelligent Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Autel Intelligent Technology has boosted its EBIT by 88%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Autel Intelligent Technology can strengthen its balance sheet over time. 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 Autel Intelligent 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. Over the last three years, Autel Intelligent Technology recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Autel Intelligent Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥396.6m. And we liked the look of last year's 88% year-on-year EBIT growth. So we are not troubled with Autel Intelligent Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Autel Intelligent Technology you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.