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.' 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 Novoray Corporation (SHSE:688300) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Novoray's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Novoray had CN¥95.5m of debt, an increase on CN¥50.0m, over one year. However, its balance sheet shows it holds CN¥420.8m in cash, so it actually has CN¥325.3m net cash.

How Healthy Is Novoray's Balance Sheet?

We can see from the most recent balance sheet that Novoray had liabilities of CN¥316.5m falling due within a year, and liabilities of CN¥161.0m due beyond that. Offsetting these obligations, it had cash of CN¥420.8m as well as receivables valued at CN¥400.1m due within 12 months. So it actually has CN¥343.5m more liquid assets than total liabilities.

This surplus suggests that Novoray has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Novoray 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 Novoray has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Novoray's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Novoray 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. During the last three years, Novoray produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Novoray has CN¥325.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 55% over the last year. So is Novoray's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Novoray, you may well want to click here to check an interactive graph of its earnings per share history.

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.