We Think Xizi Clean Energy Equipment Manufacturing (SZSE:002534) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Xizi Clean Energy Equipment Manufacturing Co., Ltd. (SZSE:002534) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xizi Clean Energy Equipment Manufacturing

How Much Debt Does Xizi Clean Energy Equipment Manufacturing Carry?

As you can see below, Xizi Clean Energy Equipment Manufacturing had CN¥2.59b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥3.48b in cash to offset that, meaning it has CN¥888.7m net cash.

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

According to the last reported balance sheet, Xizi Clean Energy Equipment Manufacturing had liabilities of CN¥8.84b due within 12 months, and liabilities of CN¥2.35b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.48b as well as receivables valued at CN¥4.67b due within 12 months. So it has liabilities totalling CN¥3.04b more than its cash and near-term receivables, combined.

Xizi Clean Energy Equipment Manufacturing has a market capitalization of CN¥7.34b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

Better yet, Xizi Clean Energy Equipment Manufacturing grew its EBIT by 171% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Xizi Clean Energy Equipment Manufacturing can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Xizi Clean Energy Equipment Manufacturing saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Xizi Clean Energy Equipment Manufacturing does have more liabilities than liquid assets, it also has net cash of CN¥888.7m. And we liked the look of last year's 171% year-on-year EBIT growth. So we are not troubled with Xizi Clean Energy Equipment Manufacturing's debt use. 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. Case in point: We've spotted 3 warning signs for Xizi Clean Energy Equipment Manufacturing you should be aware of.

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.

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