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

Warren Buffett famously said, '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. 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?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Novoray

What Is Novoray's Net Debt?

As you can see below, at the end of September 2024, Novoray had CN¥95.5m of debt, up from CN¥50.0m a year ago. Click the image for more detail. But it also has CN¥420.8m in cash to offset that, meaning it has CN¥325.3m net cash.

A Look At Novoray's Liabilities

Zooming in on the latest balance sheet data, we can see that Novoray had liabilities of CN¥316.5m due within 12 months and liabilities of CN¥161.0m due beyond that. Offsetting these obligations, it had cash of CN¥420.8m as well as receivables valued at CN¥400.1m due within 12 months. So it actually has CN¥343.5m more liquid assets than total liabilities.

This surplus suggests that Novoray has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Novoray has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Novoray has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent three years, Novoray recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Novoray has CN¥325.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 55% year-on-year EBIT growth. So we don't think Novoray's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Novoray, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.