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

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.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Suzhou Maxwell Technologies

How Much Debt Does Suzhou Maxwell Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Suzhou Maxwell Technologies had CN¥2.72b of debt, an increase on CN¥769.6m, over one year. However, it does have CN¥4.90b in cash offsetting this, leading to net cash of CN¥2.18b.

How Healthy Is Suzhou Maxwell Technologies' Balance Sheet?

We can see from the most recent balance sheet that Suzhou Maxwell Technologies had liabilities of CN¥15.8b falling due within a year, and liabilities of CN¥1.37b due beyond that. On the other hand, it had cash of CN¥4.90b and CN¥3.47b worth of receivables due within a year. So its liabilities total CN¥8.76b more than the combination of its cash and short-term receivables.

Suzhou Maxwell Technologies has a market capitalization of CN¥29.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 33% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Suzhou Maxwell Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Suzhou Maxwell Technologies 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. 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¥2.18b. And it impressed us with its EBIT growth of 33% 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Suzhou Maxwell Technologies (2 don't sit too well with us) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.