Is Xi'an Xice Testing Technology (SZSE:301306) Weighed On By Its Debt Load?

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.' 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. As with many other companies Xi'an Xice Testing Technology Co., Ltd. (SZSE:301306) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Xi'an Xice Testing Technology

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

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Xi'an Xice Testing Technology had CN¥170.8m of debt, an increase on CN¥38.3m, over one year. But on the other hand it also has CN¥373.6m in cash, leading to a CN¥202.7m net cash position.

A Look At Xi'an Xice Testing Technology's Liabilities

We can see from the most recent balance sheet that Xi'an Xice Testing Technology had liabilities of CN¥359.5m falling due within a year, and liabilities of CN¥85.9m due beyond that. Offsetting this, it had CN¥373.6m in cash and CN¥538.0m in receivables that were due within 12 months. So it actually has CN¥466.2m 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.

In the last year Xi'an Xice Testing Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to CN¥398m. 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¥341m of cash and made a loss of CN¥95m. Given it only has net cash of CN¥202.7m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Xi'an Xice Testing Technology may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 Xi'an Xice Testing Technology is showing 2 warning signs in our investment analysis , you should know about...

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.