These 4 Measures Indicate That Suzhou Maxwell Technologies (SZSE:300751) Is Using Debt Reasonably Well

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.' 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. Importantly, Suzhou Maxwell Technologies Co., Ltd. (SZSE:300751) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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 March 2024 Suzhou Maxwell Technologies had CN¥2.02b of debt, an increase on CN¥625.8m, over one year. But it also has CN¥4.43b in cash to offset that, meaning it has CN¥2.41b net cash.

A Look At Suzhou Maxwell Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Suzhou Maxwell Technologies had liabilities of CN¥15.5b due within 12 months and liabilities of CN¥997.8m due beyond that. Offsetting these obligations, it had cash of CN¥4.43b as well as receivables valued at CN¥3.40b due within 12 months. So it has liabilities totalling CN¥8.68b 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¥33.3b, 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!

Also positive, Suzhou Maxwell Technologies grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While Suzhou Maxwell Technologies does have more liabilities than liquid assets, it also has net cash of CN¥2.41b. And we liked the look of last year's 26% year-on-year EBIT growth. So we don't have any problem with Suzhou Maxwell Technologies's use of debt. 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. We've identified 3 warning signs with Suzhou Maxwell Technologies (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.

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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.

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