Wuxi Boton Technology (SZSE:300031) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 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.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Wuxi Boton Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Wuxi Boton Technology had debt of CN¥749.2m, up from CN¥633.2m in one year. 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. On the other hand, it had cash of CN¥1.23b and CN¥995.8m worth of receivables due within a year. 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!

See our latest analysis for Wuxi Boton Technology

Even more impressive was the fact that Wuxi Boton Technology grew its EBIT by 292% 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 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.

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. During the last three years, Wuxi Boton Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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 it impressed us with its EBIT growth of 292% over the last year. So we don't have any problem with Wuxi Boton Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Wuxi Boton Technology (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.