Newland Digital TechnologyLtd (SZSE:000997) Has A Rock Solid Balance Sheet

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.' 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 Newland Digital Technology Co.,Ltd. (SZSE:000997) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Newland Digital TechnologyLtd

What Is Newland Digital TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Newland Digital TechnologyLtd had debt of CN¥1.05b, up from CN¥768.3m in one year. However, it does have CN¥3.35b in cash offsetting this, leading to net cash of CN¥2.30b.

How Strong Is Newland Digital TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Newland Digital TechnologyLtd had liabilities of CN¥5.11b due within 12 months, and liabilities of CN¥159.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.35b as well as receivables valued at CN¥2.38b due within 12 months. So it can boast CN¥469.2m more liquid assets than total liabilities.

This surplus suggests that Newland Digital TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Newland Digital TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Newland Digital TechnologyLtd grew its EBIT by 163% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Newland Digital TechnologyLtd's ability to maintain a healthy balance sheet going forward. 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. While Newland Digital TechnologyLtd 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. Happily for any shareholders, Newland Digital TechnologyLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Newland Digital TechnologyLtd has CN¥2.30b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in CN¥1.2b. So is Newland Digital TechnologyLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Newland Digital TechnologyLtd .

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.