Is Xi'an Xice Testing Technology (SZSE:301306) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Xi'an Xice Testing Technology Co., Ltd. (SZSE:301306) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Xi'an Xice Testing Technology

What Is Xi'an Xice Testing Technology's Debt?

As you can see below, at the end of September 2024, Xi'an Xice Testing Technology had CN¥251.8m of debt, up from CN¥48.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥299.7m in cash, so it actually has CN¥47.8m net cash.

How Strong Is Xi'an Xice Testing Technology's Balance Sheet?

According to the last reported balance sheet, Xi'an Xice Testing Technology had liabilities of CN¥374.1m due within 12 months, and liabilities of CN¥134.1m due beyond 12 months. Offsetting this, it had CN¥299.7m in cash and CN¥598.4m in receivables that were due within 12 months. So it can boast CN¥389.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Xi'an Xice Testing Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xi'an Xice Testing Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xi'an Xice Testing Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Xi'an Xice Testing Technology reported revenue of CN¥418m, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Xi'an Xice Testing Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Xi'an Xice Testing Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥396m of cash and made a loss of CN¥130m. With only CN¥47.8m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Xi'an Xice Testing Technology may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Xi'an Xice Testing Technology .

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.

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.