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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that WuXi XDC Cayman Inc. (HKG:2268) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does WuXi XDC Cayman Carry?

The image below, which you can click on for greater detail, shows that at June 2024 WuXi XDC Cayman had debt of CN¥50.0m, up from none in one year. But it also has CN¥3.48b in cash to offset that, meaning it has CN¥3.43b net cash.

How Strong Is WuXi XDC Cayman's Balance Sheet?

According to the last reported balance sheet, WuXi XDC Cayman had liabilities of CN¥1.26b due within 12 months, and liabilities of CN¥15.4m due beyond 12 months. On the other hand, it had cash of CN¥3.48b and CN¥1.44b worth of receivables due within a year. So it can boast CN¥3.63b more liquid assets than total liabilities.

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

Even more impressive was the fact that WuXi XDC Cayman grew its EBIT by 156% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine WuXi XDC Cayman'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. WuXi XDC Cayman 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, WuXi XDC Cayman 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 WuXi XDC Cayman has CN¥3.43b in net cash and a decent-looking balance sheet. And we liked the look of last year's 156% year-on-year EBIT growth. So we are not troubled with WuXi XDC Cayman's debt use. 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 instance, we've identified 1 warning sign for WuXi XDC Cayman that you should be aware of.

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.