Here's Why Crystal Growth & Energy EquipmentLtd (SHSE:688478) 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.' 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 Crystal Growth & Energy Equipment Co.,Ltd. (SHSE:688478) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Crystal Growth & Energy EquipmentLtd

What Is Crystal Growth & Energy EquipmentLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Crystal Growth & Energy EquipmentLtd had debt of CN¥11.7m, up from CN¥7.02m in one year. But it also has CN¥1.22b in cash to offset that, meaning it has CN¥1.20b net cash.

How Healthy Is Crystal Growth & Energy EquipmentLtd's Balance Sheet?

We can see from the most recent balance sheet that Crystal Growth & Energy EquipmentLtd had liabilities of CN¥485.3m falling due within a year, and liabilities of CN¥22.9m due beyond that. On the other hand, it had cash of CN¥1.22b and CN¥221.1m worth of receivables due within a year. So it actually has CN¥928.9m more liquid assets than total liabilities.

It's good to see that Crystal Growth & Energy EquipmentLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Crystal Growth & Energy EquipmentLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Crystal Growth & Energy EquipmentLtd grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. 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 Crystal Growth & Energy EquipmentLtd'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. While Crystal Growth & Energy EquipmentLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Crystal Growth & Energy EquipmentLtd 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 Crystal Growth & Energy EquipmentLtd has net cash of CN¥1.20b, as well as more liquid assets than liabilities. And we liked the look of last year's 94% year-on-year EBIT growth. So is Crystal Growth & Energy EquipmentLtd's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Crystal Growth & Energy EquipmentLtd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.