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.' 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 Suzhou Maxwell Technologies Co., Ltd. (SZSE:300751) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Suzhou Maxwell Technologies's Net Debt?

As you can see below, at the end of September 2024, Suzhou Maxwell Technologies had CN¥3.43b of debt, up from CN¥1.39b a year ago. Click the image for more detail. However, it does have CN¥4.78b in cash offsetting this, leading to net cash of CN¥1.36b.

How Healthy Is Suzhou Maxwell Technologies' Balance Sheet?

We can see from the most recent balance sheet that Suzhou Maxwell Technologies had liabilities of CN¥14.5b falling due within a year, and liabilities of CN¥1.59b due beyond that. On the other hand, it had cash of CN¥4.78b and CN¥3.88b worth of receivables due within a year. So its liabilities total CN¥7.48b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Suzhou Maxwell Technologies is worth CN¥28.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Suzhou Maxwell Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Suzhou Maxwell Technologies has boosted its EBIT by 34%, 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 Suzhou Maxwell Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Suzhou Maxwell Technologies 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. During the last three years, Suzhou Maxwell Technologies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far 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¥1.36b. And it impressed us with its EBIT growth of 34% over the last year. So we are not troubled with Suzhou Maxwell Technologies's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Suzhou Maxwell Technologies (1 is a bit unpleasant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.