Does XTC New Energy Materials(Xiamen)Ltd (SHSE:688778) 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.' 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 can see that XTC New Energy Materials(Xiamen) Co.,Ltd. (SHSE:688778) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 XTC New Energy Materials(Xiamen)Ltd

What Is XTC New Energy Materials(Xiamen)Ltd's Debt?

As you can see below, XTC New Energy Materials(Xiamen)Ltd had CN¥947.6m of debt at September 2024, down from CN¥1.53b a year prior. But on the other hand it also has CN¥2.08b in cash, leading to a CN¥1.13b net cash position.

How Healthy Is XTC New Energy Materials(Xiamen)Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that XTC New Energy Materials(Xiamen)Ltd had liabilities of CN¥5.09b due within 12 months and liabilities of CN¥632.2m due beyond that. Offsetting this, it had CN¥2.08b in cash and CN¥3.80b in receivables that were due within 12 months. So it actually has CN¥148.7m more liquid assets than total liabilities.

Having regard to XTC New Energy Materials(Xiamen)Ltd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥20.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that XTC New Energy Materials(Xiamen)Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for XTC New Energy Materials(Xiamen)Ltd if management cannot prevent a repeat of the 39% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 XTC New Energy Materials(Xiamen)Ltd'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While XTC New Energy Materials(Xiamen)Ltd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, XTC New Energy Materials(Xiamen)Ltd 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 XTC New Energy Materials(Xiamen)Ltd has CN¥1.13b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about XTC New Energy Materials(Xiamen)Ltd's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that XTC New Energy Materials(Xiamen)Ltd is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.