Is Suzhou Maxwell Technologies (SZSE:300751) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Suzhou Maxwell Technologies Co., Ltd. (SZSE:300751) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Suzhou Maxwell Technologies

What Is Suzhou Maxwell Technologies's Net Debt?

As you can see below, at the end of September 2024, Suzhou Maxwell Technologies had CN¥3.43b of debt, up from CN¥1.39b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.78b in cash, so it actually has CN¥1.36b net cash.

How Strong Is Suzhou Maxwell Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Maxwell Technologies had liabilities of CN¥14.5b due within 12 months and liabilities of CN¥1.59b due beyond that. Offsetting this, it had CN¥4.78b in cash and CN¥3.88b in receivables that were due within 12 months. So it has liabilities totalling CN¥7.48b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Suzhou Maxwell Technologies has a market capitalization of CN¥27.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Suzhou Maxwell Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Suzhou Maxwell Technologies grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Suzhou Maxwell Technologies'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 Suzhou Maxwell Technologies 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. Over the last three years, Suzhou Maxwell Technologies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Suzhou Maxwell Technologies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.36b. And it impressed us with its EBIT growth of 34% over the last year. So we don't have any problem with Suzhou Maxwell Technologies's use of debt. 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. For example, we've discovered 3 warning signs for Suzhou Maxwell Technologies (1 can't be ignored!) that you should be aware of before investing here.

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.