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. We can see that Wuxi Boton Technology Co., Ltd. (SZSE:300031) does use debt in its business. But is this debt a concern to shareholders?

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

What Is Wuxi Boton Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Wuxi Boton Technology had CN¥715.7m of debt, an increase on CN¥553.9m, over one year. But it also has CN¥1.19b in cash to offset that, meaning it has CN¥470.9m net cash.

How Strong Is Wuxi Boton Technology's Balance Sheet?

According to the last reported balance sheet, Wuxi Boton Technology had liabilities of CN¥1.47b due within 12 months, and liabilities of CN¥199.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.19b as well as receivables valued at CN¥1.02b due within 12 months. So it actually has CN¥535.6m more liquid assets than total liabilities.

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

Better yet, Wuxi Boton Technology grew its EBIT by 222% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Wuxi Boton Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Wuxi Boton Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Wuxi Boton Technology actually recorded a cash outflow, overall. 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

While we empathize with investors who find debt concerning, you should keep in mind that Wuxi Boton Technology has net cash of CN¥470.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 222% year-on-year EBIT growth. So we don't have any problem with Wuxi Boton Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Wuxi Boton Technology that 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.