Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Delixi New Energy Technology Co., Ltd. (SHSE:603032) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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 think about a company's use of debt, we first look at cash and debt together.

What Is Delixi New Energy Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Delixi New Energy Technology had debt of CN¥182.0m, up from CN¥153.0m in one year. But on the other hand it also has CN¥321.6m in cash, leading to a CN¥139.6m net cash position.

How Strong Is Delixi New Energy Technology's Balance Sheet?

According to the last reported balance sheet, Delixi New Energy Technology had liabilities of CN¥301.6m due within 12 months, and liabilities of CN¥208.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥321.6m as well as receivables valued at CN¥225.1m due within 12 months. So it actually has CN¥36.5m more liquid assets than total liabilities.

This state of affairs indicates that Delixi New Energy Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.31b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Delixi New Energy Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Delixi New Energy 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.

In the last year Delixi New Energy Technology had a loss before interest and tax, and actually shrunk its revenue by 57%, to CN¥281m. To be frank that doesn't bode well.

So How Risky Is Delixi New Energy Technology?

Although Delixi New Energy Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥249m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Delixi New Energy Technology's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.