China XD Electric (SHSE:601179) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 China XD Electric Co., Ltd (SHSE:601179) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for China XD Electric

What Is China XD Electric's Net Debt?

As you can see below, at the end of June 2024, China XD Electric had CN¥882.9m of debt, up from CN¥725.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥10.3b in cash, so it actually has CN¥9.37b net cash.

How Healthy Is China XD Electric's Balance Sheet?

We can see from the most recent balance sheet that China XD Electric had liabilities of CN¥17.6b falling due within a year, and liabilities of CN¥1.90b due beyond that. Offsetting these obligations, it had cash of CN¥10.3b as well as receivables valued at CN¥15.8b due within 12 months. So it can boast CN¥6.50b more liquid assets than total liabilities.

This surplus suggests that China XD Electric is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, China XD Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that China XD Electric grew its EBIT by 112% over twelve months. That boost will make it even easier to pay down debt going forward. 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 China XD Electric 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China XD Electric 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, China XD Electric generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China XD Electric has CN¥9.37b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.4b, being 96% of its EBIT. When it comes to China XD Electric's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for China XD Electric that you should be aware of before investing here.

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.

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.