Does Xi'an Bright Laser TechnologiesLtd (SHSE:688333) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Xi'an Bright Laser Technologies Co.,Ltd. (SHSE:688333) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Xi'an Bright Laser TechnologiesLtd

What Is Xi'an Bright Laser TechnologiesLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Xi'an Bright Laser TechnologiesLtd had debt of CN¥789.1m, up from CN¥685.4m in one year. However, its balance sheet shows it holds CN¥2.83b in cash, so it actually has CN¥2.04b net cash.

How Healthy Is Xi'an Bright Laser TechnologiesLtd's Balance Sheet?

The latest balance sheet data shows that Xi'an Bright Laser TechnologiesLtd had liabilities of CN¥1.25b due within a year, and liabilities of CN¥427.1m falling due after that. Offsetting these obligations, it had cash of CN¥2.83b as well as receivables valued at CN¥1.08b due within 12 months. So it can boast CN¥2.23b more liquid assets than total liabilities.

This surplus suggests that Xi'an Bright Laser TechnologiesLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xi'an Bright Laser TechnologiesLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Xi'an Bright Laser TechnologiesLtd grew its EBIT by 50% 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 Xi'an Bright Laser TechnologiesLtd'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. Xi'an Bright Laser TechnologiesLtd 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 two years, Xi'an Bright Laser TechnologiesLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xi'an Bright Laser TechnologiesLtd has CN¥2.04b in net cash and a decent-looking balance sheet. And we liked the look of last year's 50% year-on-year EBIT growth. So we are not troubled with Xi'an Bright Laser TechnologiesLtd's debt use. 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 example Xi'an Bright Laser TechnologiesLtd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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.