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. We note that Suzhou Maxwell Technologies Co., Ltd. (SZSE:300751) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Suzhou Maxwell Technologies's Net Debt?

As you can see below, at the end of March 2024, Suzhou Maxwell Technologies had CN¥2.02b of debt, up from CN¥625.8m a year ago. Click the image for more detail. However, it does have CN¥4.43b in cash offsetting this, leading to net cash of CN¥2.41b.

A Look At Suzhou Maxwell Technologies' Liabilities

According to the last reported balance sheet, Suzhou Maxwell Technologies had liabilities of CN¥15.5b due within 12 months, and liabilities of CN¥997.8m due beyond 12 months. Offsetting this, it had CN¥4.43b in cash and CN¥3.40b in receivables that were due within 12 months. So its liabilities total CN¥8.68b more than the combination of its cash and short-term receivables.

Suzhou Maxwell Technologies has a market capitalization of CN¥36.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Suzhou Maxwell Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Suzhou Maxwell Technologies has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Suzhou Maxwell Technologies'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Suzhou Maxwell Technologies 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. Over the last three years, Suzhou Maxwell Technologies recorded negative free cash flow, in total. 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 Suzhou Maxwell Technologies does have more liabilities than liquid assets, it also has net cash of CN¥2.41b. And it impressed us with its EBIT growth of 26% over the last year. So we are not troubled with Suzhou Maxwell Technologies's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Suzhou Maxwell Technologies (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.