Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Neway Valve (Suzhou) Co., Ltd. (SHSE:603699) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Neway Valve (Suzhou)'s Debt?
As you can see below, at the end of March 2024, Neway Valve (Suzhou) had CN¥1.23b of debt, up from CN¥1.08b a year ago. Click the image for more detail. But on the other hand it also has CN¥1.30b in cash, leading to a CN¥74.8m net cash position.
How Strong Is Neway Valve (Suzhou)'s Balance Sheet?
We can see from the most recent balance sheet that Neway Valve (Suzhou) had liabilities of CN¥3.76b falling due within a year, and liabilities of CN¥62.9m due beyond that. Offsetting this, it had CN¥1.30b in cash and CN¥2.53b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Neway Valve (Suzhou)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥13.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Neway Valve (Suzhou) 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 Neway Valve (Suzhou) has boosted its EBIT by 78%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Neway Valve (Suzhou) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Neway Valve (Suzhou) 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 most recent three years, Neway Valve (Suzhou) recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Neway Valve (Suzhou) has net cash of CN¥74.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 78% over the last year. So is Neway Valve (Suzhou)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Neway Valve (Suzhou) is showing 1 warning sign in our investment analysis , you should know about...
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.
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