Is Neway CNC Equipment (Suzhou) (SHSE:688697) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Neway CNC Equipment (Suzhou) Co., Ltd. (SHSE:688697) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Neway CNC Equipment (Suzhou)

What Is Neway CNC Equipment (Suzhou)'s Debt?

As you can see below, at the end of June 2024, Neway CNC Equipment (Suzhou) had CN¥1.02b of debt, up from CN¥419.4m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.11b in cash, leading to a CN¥83.5m net cash position.

How Healthy Is Neway CNC Equipment (Suzhou)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Neway CNC Equipment (Suzhou) had liabilities of CN¥2.19b due within 12 months and liabilities of CN¥30.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.11b as well as receivables valued at CN¥964.6m due within 12 months. So its liabilities total CN¥149.0m more than the combination of its cash and short-term receivables.

Of course, Neway CNC Equipment (Suzhou) has a market capitalization of CN¥5.15b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Neway CNC Equipment (Suzhou) boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Neway CNC Equipment (Suzhou) grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Neway CNC Equipment (Suzhou)'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. Neway CNC Equipment (Suzhou) 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. Looking at the most recent three years, Neway CNC Equipment (Suzhou) recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Neway CNC Equipment (Suzhou)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥83.5m. And it also grew its EBIT by 4.9% over the last year. So we are not troubled with Neway CNC Equipment (Suzhou)'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 Neway CNC Equipment (Suzhou) has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.