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. As with many other companies Urovo Technology Co., Ltd. (SZSE:300531) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?

As you can see below, at the end of September 2022, Urovo Technology had CN¥333.3m of debt, up from CN¥235.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥751.3m in cash, so it actually has CN¥418.0m net cash.

How Strong Is Urovo Technology's Balance Sheet?

We can see from the most recent balance sheet that Urovo Technology had liabilities of CN¥600.7m falling due within a year, and liabilities of CN¥7.34m due beyond that. Offsetting this, it had CN¥751.3m in cash and CN¥434.6m in receivables that were due within 12 months. So it can boast CN¥577.9m 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. Succinctly put, Urovo Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Urovo Technology has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Urovo 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Urovo Technology generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Urovo Technology has CN¥418.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in CN¥152m. So we are not troubled with Urovo Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Urovo Technology, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.