Is Delixi New Energy Technology (SHSE:603032) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Delixi New Energy Technology Co., Ltd. (SHSE:603032) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Delixi New Energy Technology

What Is Delixi New Energy Technology's Debt?

The image below, which you can click on for greater detail, shows that Delixi New Energy Technology had debt of CN¥153.0m at the end of September 2023, a reduction from CN¥206.2m over a year. However, it does have CN¥355.5m in cash offsetting this, leading to net cash of CN¥202.5m.

How Healthy Is Delixi New Energy Technology's Balance Sheet?

The latest balance sheet data shows that Delixi New Energy Technology had liabilities of CN¥150.9m due within a year, and liabilities of CN¥279.3m falling due after that. Offsetting this, it had CN¥355.5m in cash and CN¥402.9m in receivables that were due within 12 months. So it actually has CN¥328.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Delixi New Energy Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Delixi New Energy Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Delixi New Energy Technology grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Delixi New Energy Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Delixi New Energy Technology 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, Delixi New Energy Technology produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Delixi New Energy Technology has net cash of CN¥202.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 40% year-on-year EBIT growth. So is Delixi New Energy Technology'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Delixi New Energy Technology is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.