Is Neway Valve (Suzhou) (SHSE:603699) Using Too Much Debt?

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.' 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 Neway Valve (Suzhou) Co., Ltd. (SHSE:603699) makes use of debt. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Neway Valve (Suzhou)

What Is Neway Valve (Suzhou)'s Debt?

As you can see below, at the end of June 2024, Neway Valve (Suzhou) had CN¥1.30b of debt, up from CN¥1.12b a year ago. Click the image for more detail. But it also has CN¥1.52b in cash to offset that, meaning it has CN¥216.9m net cash.

A Look At Neway Valve (Suzhou)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Neway Valve (Suzhou) had liabilities of CN¥4.26b due within 12 months and liabilities of CN¥60.6m due beyond that. On the other hand, it had cash of CN¥1.52b and CN¥2.56b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥234.3m.

Having regard to Neway Valve (Suzhou)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥17.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Neway Valve (Suzhou) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Neway Valve (Suzhou) grew its EBIT by 56% 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 future earnings, more than anything, that will determine Neway Valve (Suzhou)'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 Neway Valve (Suzhou) 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, Neway Valve (Suzhou) produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Neway Valve (Suzhou)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥216.9m. And it impressed us with its EBIT growth of 56% over the last year. So is Neway Valve (Suzhou)'s debt a risk? It doesn't seem so to us. 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 1 warning sign for Neway Valve (Suzhou) that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.