Does Wuxi Boton Technology (SZSE:300031) 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. We can see that Wuxi Boton Technology Co., Ltd. (SZSE:300031) does use debt in its business. But is this debt a concern to shareholders?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Wuxi Boton Technology

What Is Wuxi Boton Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Wuxi Boton Technology had debt of CN¥833.2m, up from CN¥561.6m in one year. But it also has CN¥1.34b in cash to offset that, meaning it has CN¥505.2m net cash.

How Healthy Is Wuxi Boton Technology's Balance Sheet?

We can see from the most recent balance sheet that Wuxi Boton Technology had liabilities of CN¥1.74b falling due within a year, and liabilities of CN¥254.8m due beyond that. Offsetting this, it had CN¥1.34b in cash and CN¥978.1m in receivables that were due within 12 months. So it can boast CN¥318.9m more liquid assets than total liabilities.

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

Better yet, Wuxi Boton Technology grew its EBIT by 332% last year, which is an impressive improvement. 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 it is future earnings, more than anything, that will determine Wuxi Boton Technology'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. Wuxi Boton 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, Wuxi Boton Technology reported free cash flow worth 8.0% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wuxi Boton Technology has net cash of CN¥505.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 332% year-on-year EBIT growth. So we don't think Wuxi Boton Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wuxi Boton Technology is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.