Wuxi Boton Technology (SZSE:300031) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Wuxi Boton Technology Co., Ltd. (SZSE:300031) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wuxi Boton Technology

What Is Wuxi Boton Technology's Net Debt?

As you can see below, at the end of September 2024, Wuxi Boton Technology had CN¥749.2m of debt, up from CN¥633.2m a year ago. Click the image for more detail. But it also has CN¥1.23b in cash to offset that, meaning it has CN¥482.5m net cash.

A Look At Wuxi Boton Technology's Liabilities

The latest balance sheet data shows that Wuxi Boton Technology had liabilities of CN¥1.55b due within a year, and liabilities of CN¥207.1m falling due after that. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥995.8m due within 12 months. So it can boast CN¥469.0m 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. Succinctly put, Wuxi Boton Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Wuxi Boton Technology grew its EBIT by 292% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Wuxi Boton Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

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¥482.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 292% year-on-year EBIT growth. So we don't have any problem with Wuxi Boton Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. 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...

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.