Neway CNC Equipment (Suzhou) (SHSE:688697) Seems To Use Debt Quite Sensibly

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 Neway CNC Equipment (Suzhou) Co., Ltd. (SHSE:688697) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Neway CNC Equipment (Suzhou)

How Much Debt Does Neway CNC Equipment (Suzhou) Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Neway CNC Equipment (Suzhou) had CN¥565.2m of debt, an increase on CN¥475.3m, over one year. But on the other hand it also has CN¥1.42b in cash, leading to a CN¥858.4m net cash position.

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

We can see from the most recent balance sheet that Neway CNC Equipment (Suzhou) had liabilities of CN¥2.16b falling due within a year, and liabilities of CN¥32.4m due beyond that. On the other hand, it had cash of CN¥1.42b and CN¥815.6m worth of receivables due within a year. So it can boast CN¥48.7m more liquid assets than total liabilities.

This state of affairs indicates that Neway CNC Equipment (Suzhou)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.94b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, 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 7.4% 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 ultimately the future profitability of the business will decide if Neway CNC Equipment (Suzhou) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Neway CNC Equipment (Suzhou) has net cash of CN¥858.4m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 7.4% in the last twelve months. So we are not troubled with Neway CNC Equipment (Suzhou)'s debt use. 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. Be aware that Neway CNC Equipment (Suzhou) is showing 1 warning sign in our investment analysis , you should know about...

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.

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