Xiamen Solex High-tech Industries (SHSE:603992) Seems To Use Debt Rather Sparingly

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

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Xiamen Solex High-tech Industries

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

The chart below, which you can click on for greater detail, shows that Xiamen Solex High-tech Industries had CN¥625.2m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥1.62b in cash, so it actually has CN¥998.9m net cash.

How Healthy Is Xiamen Solex High-tech Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xiamen Solex High-tech Industries had liabilities of CN¥752.1m due within 12 months and liabilities of CN¥679.9m due beyond that. Offsetting this, it had CN¥1.62b in cash and CN¥565.8m in receivables that were due within 12 months. So it actually has CN¥757.8m more liquid assets than total liabilities.

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

Another good sign is that Xiamen Solex High-tech Industries has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. 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 Xiamen Solex High-tech Industries can strengthen its balance sheet over time. 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 last three years, Xiamen Solex High-tech Industries recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xiamen Solex High-tech Industries has CN¥998.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥397m. So is Xiamen Solex High-tech Industries'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. For instance, we've identified 1 warning sign for Xiamen Solex High-tech Industries that 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.