David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies WuXi Xinje Electric Co.,Ltd. (SHSE:603416) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is WuXi Xinje ElectricLtd's Net Debt?

The image below, which you can click on for greater detail, shows that WuXi Xinje ElectricLtd had debt of CN¥33.0m at the end of September 2024, a reduction from CN¥110.0m over a year. But it also has CN¥1.05b in cash to offset that, meaning it has CN¥1.01b net cash.

How Strong Is WuXi Xinje ElectricLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WuXi Xinje ElectricLtd had liabilities of CN¥885.3m due within 12 months and liabilities of CN¥31.3m due beyond that. On the other hand, it had cash of CN¥1.05b and CN¥526.2m worth of receivables due within a year. So it actually has CN¥656.6m more liquid assets than total liabilities.

This surplus suggests that WuXi Xinje ElectricLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that WuXi Xinje ElectricLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that WuXi Xinje ElectricLtd has boosted its EBIT by 35%, 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 WuXi Xinje ElectricLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WuXi Xinje ElectricLtd 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, WuXi Xinje ElectricLtd recorded free cash flow worth 54% 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 it is always sensible to investigate a company's debt, in this case WuXi Xinje ElectricLtd has CN¥1.01b in net cash and a decent-looking balance sheet. And we liked the look of last year's 35% year-on-year EBIT growth. So is WuXi Xinje ElectricLtd'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. To that end, you should be aware of the 1 warning sign we've spotted with WuXi Xinje ElectricLtd .

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.