Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Chengdu JOUAV Automation Tech Co.,Ltd. (SHSE:688070) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Chengdu JOUAV Automation TechLtd's Debt?
The image below, which you can click on for greater detail, shows that Chengdu JOUAV Automation TechLtd had debt of CN¥137.0m at the end of September 2024, a reduction from CN¥165.7m over a year. However, it does have CN¥115.9m in cash offsetting this, leading to net debt of about CN¥21.1m.
How Strong Is Chengdu JOUAV Automation TechLtd's Balance Sheet?
We can see from the most recent balance sheet that Chengdu JOUAV Automation TechLtd had liabilities of CN¥413.1m falling due within a year, and liabilities of CN¥16.9m due beyond that. On the other hand, it had cash of CN¥115.9m and CN¥153.5m worth of receivables due within a year. So it has liabilities totalling CN¥160.7m more than its cash and near-term receivables, combined.
Given Chengdu JOUAV Automation TechLtd has a market capitalization of CN¥3.85b, 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. But either way, Chengdu JOUAV Automation TechLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Chengdu JOUAV Automation TechLtd will need earnings to service that debt. 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.
In the last year Chengdu JOUAV Automation TechLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥323m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Chengdu JOUAV Automation TechLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥61m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥42m of cash over the last year. So suffice it to say we do consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Chengdu JOUAV Automation TechLtd you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
