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.' 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, Novoray Corporation (SHSE:688300) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Novoray Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Novoray had debt of CN¥120.5m, up from CN¥4.67m in one year. But it also has CN¥454.2m in cash to offset that, meaning it has CN¥333.7m net cash.

How Strong Is Novoray's Balance Sheet?

According to the last reported balance sheet, Novoray had liabilities of CN¥301.8m due within 12 months, and liabilities of CN¥151.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥454.2m as well as receivables valued at CN¥330.3m due within 12 months. So it actually has CN¥331.0m more liquid assets than total liabilities.

This surplus suggests that Novoray has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Novoray boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Novoray has boosted its EBIT by 65%, 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 Novoray 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Novoray 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, Novoray recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Novoray has CN¥333.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 65% over the last year. So is Novoray's debt a risk? It doesn't seem so to us. 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 Novoray that you should be aware of.

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.

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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.