Is Xiamen Solex High-tech Industries (SHSE:603992) A Risky Investment?

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. Importantly, Xiamen Solex High-tech Industries Co., Ltd. (SHSE:603992) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 Xiamen Solex High-tech Industries

What Is Xiamen Solex High-tech Industries's Net Debt?

As you can see below, at the end of September 2023, Xiamen Solex High-tech Industries had CN¥634.0m of debt, up from CN¥590.4m a year ago. Click the image for more detail. But it also has CN¥1.66b in cash to offset that, meaning it has CN¥1.03b net cash.

A Look At Xiamen Solex High-tech Industries' Liabilities

The latest balance sheet data shows that Xiamen Solex High-tech Industries had liabilities of CN¥788.5m due within a year, and liabilities of CN¥990.3m falling due after that. Offsetting these obligations, it had cash of CN¥1.66b as well as receivables valued at CN¥799.3m due within 12 months. So it can boast CN¥680.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Xiamen Solex High-tech Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xiamen Solex High-tech Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Xiamen Solex High-tech Industries saw its EBIT drop by 8.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Xiamen Solex High-tech Industries'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. Xiamen Solex High-tech Industries 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. Over the most recent three years, Xiamen Solex High-tech Industries recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xiamen Solex High-tech Industries has CN¥1.03b in net cash and a decent-looking balance sheet. So we are not troubled with Xiamen Solex High-tech Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Xiamen Solex High-tech Industries you should be aware of.

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.