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. Importantly, Urovo Technology Co., Ltd. (SZSE:300531) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Urovo Technology

What Is Urovo Technology's Debt?

The chart below, which you can click on for greater detail, shows that Urovo Technology had CN¥297.1m in debt in June 2022; about the same as the year before. But on the other hand it also has CN¥625.4m in cash, leading to a CN¥328.3m net cash position.

How Healthy Is Urovo Technology's Balance Sheet?

We can see from the most recent balance sheet that Urovo Technology had liabilities of CN¥574.7m falling due within a year, and liabilities of CN¥10.6m due beyond that. On the other hand, it had cash of CN¥625.4m and CN¥455.0m worth of receivables due within a year. So it actually has CN¥495.1m more liquid assets than total liabilities.

This surplus suggests that Urovo Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Urovo Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Urovo Technology has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Urovo Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Urovo 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. Looking at the most recent three years, Urovo Technology recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Urovo Technology has net cash of CN¥328.3m, as well as more liquid assets than liabilities. So we are not troubled with Urovo Technology's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Urovo Technology's earnings per share history for free.

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.

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.