These 4 Measures Indicate That Novoray (SHSE:688300) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Novoray Corporation (SHSE:688300) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Novoray

What Is Novoray's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Novoray had debt of CN¥118.6m, up from CN¥4.67m in one year. But it also has CN¥554.2m in cash to offset that, meaning it has CN¥435.6m net cash.

How Healthy Is Novoray's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Novoray had liabilities of CN¥301.8m due within 12 months and liabilities of CN¥151.8m due beyond that. Offsetting these obligations, it had cash of CN¥554.2m as well as receivables valued at CN¥331.0m due within 12 months. So it can boast CN¥431.7m 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.

On top of that, Novoray grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Novoray can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Novoray has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Novoray recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Novoray has net cash of CN¥435.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 56% over the last year. So is Novoray's debt a risk? It doesn't seem so to us. 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 Novoray is showing 1 warning sign 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.