Does MayAir Technology (China) (SHSE:688376) Have A Healthy Balance Sheet?

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.' 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. We can see that MayAir Technology (China) Co., Ltd. (SHSE:688376) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MayAir Technology (China)

What Is MayAir Technology (China)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2024 MayAir Technology (China) had debt of CN¥663.5m, up from CN¥501.0m in one year. However, its balance sheet shows it holds CN¥895.4m in cash, so it actually has CN¥231.9m net cash.

How Strong Is MayAir Technology (China)'s Balance Sheet?

According to the last reported balance sheet, MayAir Technology (China) had liabilities of CN¥1.22b due within 12 months, and liabilities of CN¥341.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥895.4m as well as receivables valued at CN¥1.03b due within 12 months. So it can boast CN¥368.4m more liquid assets than total liabilities.

This short term liquidity is a sign that MayAir Technology (China) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MayAir Technology (China) has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that MayAir Technology (China) has been able to increase its EBIT by 20% in twelve months, making it easier to pay down 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 MayAir Technology (China)'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. MayAir Technology (China) 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, MayAir Technology (China) 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 we empathize with investors who find debt concerning, you should keep in mind that MayAir Technology (China) has net cash of CN¥231.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 20% over the last year. So we don't have any problem with MayAir Technology (China)'s use of debt. 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. Be aware that MayAir Technology (China) is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.