Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, XTC New Energy Materials(Xiamen) Co.,Ltd. (SHSE:688778) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

How Much Debt Does XTC New Energy Materials(Xiamen)Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that XTC New Energy Materials(Xiamen)Ltd had CN¥1.63b of debt in March 2024, down from CN¥1.74b, one year before. But on the other hand it also has CN¥2.78b in cash, leading to a CN¥1.15b net cash position.

How Healthy Is XTC New Energy Materials(Xiamen)Ltd's Balance Sheet?

The latest balance sheet data shows that XTC New Energy Materials(Xiamen)Ltd had liabilities of CN¥4.56b due within a year, and liabilities of CN¥924.5m falling due after that. Offsetting these obligations, it had cash of CN¥2.78b as well as receivables valued at CN¥3.52b due within 12 months. So it actually has CN¥819.0m more liquid assets than total liabilities.

This short term liquidity is a sign that XTC New Energy Materials(Xiamen)Ltd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that XTC New Energy Materials(Xiamen)Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for XTC New Energy Materials(Xiamen)Ltd if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if XTC New Energy Materials(Xiamen)Ltd 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 company can only pay off debt with cold hard cash, not accounting profits. While XTC New Energy Materials(Xiamen)Ltd 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, XTC New Energy Materials(Xiamen)Ltd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case XTC New Energy Materials(Xiamen)Ltd has CN¥1.15b in net cash and a decent-looking balance sheet. So while XTC New Energy Materials(Xiamen)Ltd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for XTC New Energy Materials(Xiamen)Ltd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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