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. We note that Xiamen Voke Mold & Plastic Engineering Co., Ltd. (SZSE:301196) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Xiamen Voke Mold & Plastic Engineering Carry?
You can click the graphic below for the historical numbers, but it shows that Xiamen Voke Mold & Plastic Engineering had CN¥43.2m of debt in June 2024, down from CN¥50.9m, one year before. But it also has CN¥1.10b in cash to offset that, meaning it has CN¥1.06b net cash.
A Look At Xiamen Voke Mold & Plastic Engineering's Liabilities
We can see from the most recent balance sheet that Xiamen Voke Mold & Plastic Engineering had liabilities of CN¥496.6m falling due within a year, and liabilities of CN¥138.8m due beyond that. Offsetting this, it had CN¥1.10b in cash and CN¥578.7m in receivables that were due within 12 months. So it can boast CN¥1.04b more liquid assets than total liabilities.
This excess liquidity suggests that Xiamen Voke Mold & Plastic Engineering is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Xiamen Voke Mold & Plastic Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Xiamen Voke Mold & Plastic Engineering grew its EBIT by 68% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Xiamen Voke Mold & Plastic Engineering will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Xiamen Voke Mold & Plastic Engineering 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, Xiamen Voke Mold & Plastic Engineering saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Xiamen Voke Mold & Plastic Engineering has CN¥1.06b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 68% over the last year. So we don't think Xiamen Voke Mold & Plastic Engineering'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. For example, we've discovered 2 warning signs for Xiamen Voke Mold & Plastic Engineering (1 can't be ignored!) that you should be aware of before investing here.
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.
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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.
