Is Suzhou Maxwell Technologies (SZSE:300751) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Suzhou Maxwell Technologies Co., Ltd. (SZSE:300751) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Suzhou Maxwell Technologies

What Is Suzhou Maxwell Technologies's Net Debt?

As you can see below, at the end of September 2023, Suzhou Maxwell Technologies had CN¥1.39b of debt, up from CN¥290.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.46b in cash, so it actually has CN¥3.07b net cash.

How Strong Is Suzhou Maxwell Technologies' Balance Sheet?

According to the last reported balance sheet, Suzhou Maxwell Technologies had liabilities of CN¥15.0b due within 12 months, and liabilities of CN¥964.0m due beyond 12 months. On the other hand, it had cash of CN¥4.46b and CN¥2.95b worth of receivables due within a year. So it has liabilities totalling CN¥8.56b 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¥33.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Suzhou Maxwell Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Suzhou Maxwell Technologies grew its EBIT at 12% over the last year, further increasing its ability to manage 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Suzhou Maxwell Technologies's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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¥3.07b. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with Suzhou Maxwell Technologies's debt use. 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 Suzhou Maxwell Technologies has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.

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.