Here's Why Maxio Technology (Hangzhou) (SHSE:688449) Can Manage Its Debt Responsibly

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.' 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 can see that Maxio Technology (Hangzhou) Co., Ltd. (SHSE:688449) does use debt in its business. But is this debt a concern to shareholders?

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. 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. 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.

What Is Maxio Technology (Hangzhou)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Maxio Technology (Hangzhou) had CN¥153.6m of debt, an increase on CN¥80.1m, over one year. However, it also had CN¥129.2m in cash, and so its net debt is CN¥24.3m.

How Strong Is Maxio Technology (Hangzhou)'s Balance Sheet?

The latest balance sheet data shows that Maxio Technology (Hangzhou) had liabilities of CN¥355.5m due within a year, and liabilities of CN¥80.5m falling due after that. Offsetting this, it had CN¥129.2m in cash and CN¥307.5m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Maxio Technology (Hangzhou)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥21.4b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Maxio Technology (Hangzhou) has a very light debt load indeed.

View our latest analysis for Maxio Technology (Hangzhou)

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Maxio Technology (Hangzhou) has a low net debt to EBITDA ratio of only 0.15. And its EBIT covers its interest expense a whopping 69.1 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that Maxio Technology (Hangzhou) grew its EBIT by 282% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Maxio Technology (Hangzhou)'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent two years, Maxio Technology (Hangzhou) recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that Maxio Technology (Hangzhou)'s demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Looking at the bigger picture, we think Maxio Technology (Hangzhou)'s use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Maxio Technology (Hangzhou) you should know about.

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.