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Innuovo Technology (SZSE:000795) Has A Rock Solid 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Innuovo Technology Co., Ltd. (SZSE:000795) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Innuovo Technology
What Is Innuovo Technology's Debt?
As you can see below, Innuovo Technology had CN¥295.0m of debt at September 2024, down from CN¥1.28b a year prior. However, it does have CN¥813.7m in cash offsetting this, leading to net cash of CN¥518.6m.
How Healthy Is Innuovo Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Innuovo Technology had liabilities of CN¥1.12b due within 12 months and liabilities of CN¥81.5m due beyond that. Offsetting these obligations, it had cash of CN¥813.7m as well as receivables valued at CN¥1.05b due within 12 months. So it can boast CN¥663.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Innuovo Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Innuovo Technology has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Innuovo Technology grew its EBIT by 116% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Innuovo Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Innuovo Technology 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 last three years, Innuovo Technology recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Innuovo Technology has net cash of CN¥518.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥442m. So we don't think Innuovo Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 Innuovo Technology .
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.
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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.
About SZSE:000795
Innuovo Technology
Engages in the research and development, production, and sale of rare earth permanent magnet materials in China and internationally.