Does China XD Electric (SHSE:601179) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that China XD Electric Co., Ltd (SHSE:601179) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China XD Electric

What Is China XD Electric's Net Debt?

The image below, which you can click on for greater detail, shows that China XD Electric had debt of CN¥680.3m at the end of September 2024, a reduction from CN¥1.84b over a year. However, its balance sheet shows it holds CN¥9.48b in cash, so it actually has CN¥8.80b net cash.

How Strong Is China XD Electric's Balance Sheet?

The latest balance sheet data shows that China XD Electric had liabilities of CN¥19.2b due within a year, and liabilities of CN¥1.71b falling due after that. On the other hand, it had cash of CN¥9.48b and CN¥14.6b worth of receivables due within a year. So it can boast CN¥3.19b more liquid assets than total liabilities.

This surplus suggests that China XD Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China XD Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, China XD Electric grew its EBIT by 152% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China XD Electric'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.

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. Over the last three years, China XD Electric actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China XD Electric has net cash of CN¥8.80b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.6b, being 112% of its EBIT. So is China XD Electric's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - China XD Electric has 1 warning sign we think you should be aware of.

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.