Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Xiamen Solex High-tech Industries Co., Ltd. (SHSE:603992) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Xiamen Solex High-tech Industries's Net Debt?

As you can see below, Xiamen Solex High-tech Industries had CN¥614.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥1.62b in cash, so it actually has CN¥1.01b net cash.

A Look At Xiamen Solex High-tech Industries' Liabilities

The latest balance sheet data shows that Xiamen Solex High-tech Industries had liabilities of CN¥734.7m due within a year, and liabilities of CN¥683.6m falling due after that. Offsetting this, it had CN¥1.62b in cash and CN¥542.9m in receivables that were due within 12 months. So it actually has CN¥744.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Xiamen Solex High-tech Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xiamen Solex High-tech Industries 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 Xiamen Solex High-tech Industries has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. 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 Xiamen Solex High-tech Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Xiamen Solex High-tech Industries 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, Xiamen Solex High-tech Industries generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xiamen Solex High-tech Industries has net cash of CN¥1.01b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥384m, being 80% of its EBIT. So we don't think Xiamen Solex High-tech Industries's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Xiamen Solex High-tech Industries .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com