Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Suzhou Maxwell Technologies Co., Ltd. (SZSE:300751) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Suzhou Maxwell Technologies's Net Debt?

As you can see below, at the end of June 2024, Suzhou Maxwell Technologies had CN¥2.72b of debt, up from CN¥769.6m a year ago. Click the image for more detail. However, it does have CN¥4.90b in cash offsetting this, leading to net cash of CN¥2.18b.

How Strong Is Suzhou Maxwell Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Maxwell Technologies had liabilities of CN¥15.8b due within 12 months and liabilities of CN¥1.37b due beyond that. On the other hand, it had cash of CN¥4.90b and CN¥3.47b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.76b.

While this might seem like a lot, it is not so bad since Suzhou Maxwell Technologies has a market capitalization of CN¥29.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Suzhou Maxwell Technologies 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 Suzhou Maxwell Technologies has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 Suzhou Maxwell Technologies 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. Suzhou Maxwell Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Suzhou Maxwell Technologies saw substantial negative free cash flow, in total. 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

Although Suzhou Maxwell Technologies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥2.18b. And it impressed us with its EBIT growth of 33% over the last year. So we don't have any problem with Suzhou Maxwell Technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Suzhou Maxwell Technologies (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.