Does Novoray (SHSE:688300) Have A Healthy Balance Sheet?

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.' 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. Importantly, Novoray Corporation (SHSE:688300) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Novoray

What Is Novoray's Debt?

As you can see below, at the end of December 2023, Novoray had CN¥89.2m of debt, up from CN¥400.0k a year ago. Click the image for more detail. However, it does have CN¥565.1m in cash offsetting this, leading to net cash of CN¥475.9m.

A Look At Novoray's Liabilities

We can see from the most recent balance sheet that Novoray had liabilities of CN¥250.5m falling due within a year, and liabilities of CN¥156.8m due beyond that. On the other hand, it had cash of CN¥565.1m and CN¥296.4m worth of receivables due within a year. So it actually has CN¥454.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Novoray could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Novoray has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Novoray grew its EBIT by 3.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Novoray'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 company can only pay off debt with cold hard cash, not accounting profits. Novoray 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. Looking at the most recent three years, Novoray recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Novoray has net cash of CN¥475.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 3.0% over the last year. So we are not troubled with Novoray's debt use. 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 1 warning sign we've spotted with Novoray .

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.

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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.