Here's Why MayAir Technology (China) (SHSE:688376) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies MayAir Technology (China) Co., Ltd. (SHSE:688376) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MayAir Technology (China)

What Is MayAir Technology (China)'s Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 MayAir Technology (China) had debt of CN¥524.8m, up from CN¥410.9m in one year. However, its balance sheet shows it holds CN¥1.02b in cash, so it actually has CN¥492.1m net cash.

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

Zooming in on the latest balance sheet data, we can see that MayAir Technology (China) had liabilities of CN¥1.10b due within 12 months and liabilities of CN¥91.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.02b as well as receivables valued at CN¥841.4m due within 12 months. So it can boast CN¥662.4m 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. Succinctly put, MayAir Technology (China) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, MayAir Technology (China) grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MayAir Technology (China)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, MayAir Technology (China) burned a lot of cash. 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 MayAir Technology (China) has CN¥492.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 39% over the last year. So we don't have any problem with MayAir Technology (China)'s use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MayAir Technology (China)'s earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.