Is Xizi Clean Energy Equipment Manufacturing (SZSE:002534) Using Too Much Debt?

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.' 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 Xizi Clean Energy Equipment Manufacturing Co., Ltd. (SZSE:002534) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Xizi Clean Energy Equipment Manufacturing

What Is Xizi Clean Energy Equipment Manufacturing's Debt?

As you can see below, Xizi Clean Energy Equipment Manufacturing had CN¥1.88b of debt at September 2024, down from CN¥2.83b a year prior. However, it does have CN¥3.07b in cash offsetting this, leading to net cash of CN¥1.19b.

How Healthy Is Xizi Clean Energy Equipment Manufacturing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xizi Clean Energy Equipment Manufacturing had liabilities of CN¥8.31b due within 12 months and liabilities of CN¥2.37b due beyond that. On the other hand, it had cash of CN¥3.07b and CN¥4.93b worth of receivables due within a year. So it has liabilities totalling CN¥2.67b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Xizi Clean Energy Equipment Manufacturing has a market capitalization of CN¥9.06b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Xizi Clean Energy Equipment Manufacturing also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Xizi Clean Energy Equipment Manufacturing grew its EBIT by 189% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Xizi Clean Energy Equipment Manufacturing's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xizi Clean Energy Equipment Manufacturing 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, Xizi Clean Energy Equipment Manufacturing 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

Although Xizi Clean Energy Equipment Manufacturing's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.19b. And it impressed us with its EBIT growth of 189% over the last year. So we don't have any problem with Xizi Clean Energy Equipment Manufacturing'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 Xizi Clean Energy Equipment Manufacturing is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.