Neway Valve (Suzhou) (SHSE:603699) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Neway Valve (Suzhou) Co., Ltd. (SHSE:603699) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Neway Valve (Suzhou)

What Is Neway Valve (Suzhou)'s Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Neway Valve (Suzhou) had debt of CN¥1.23b, up from CN¥1.08b in one year. But it also has CN¥1.30b in cash to offset that, meaning it has CN¥74.8m net cash.

How Healthy Is Neway Valve (Suzhou)'s Balance Sheet?

The latest balance sheet data shows that Neway Valve (Suzhou) had liabilities of CN¥3.76b due within a year, and liabilities of CN¥62.9m falling due after that. Offsetting these obligations, it had cash of CN¥1.30b as well as receivables valued at CN¥2.53b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Neway Valve (Suzhou)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥14.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Neway Valve (Suzhou) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Neway Valve (Suzhou) has boosted its EBIT by 78%, thus reducing the spectre of future debt repayments. 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 Neway Valve (Suzhou) 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Neway Valve (Suzhou) recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Neway Valve (Suzhou) has net cash of CN¥74.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 78% over the last year. So we don't think Neway Valve (Suzhou)'s use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Neway Valve (Suzhou) 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.