Newland Digital TechnologyLtd (SZSE:000997) Seems To Use Debt Rather Sparingly

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. Importantly, Newland Digital Technology Co.,Ltd. (SZSE:000997) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 Newland Digital TechnologyLtd had debt of CN¥1.23b at the end of September 2024, a reduction from CN¥1.35b over a year. However, its balance sheet shows it holds CN¥4.08b in cash, so it actually has CN¥2.85b net cash.

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How Healthy Is Newland Digital TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Newland Digital TechnologyLtd had liabilities of CN¥5.09b due within 12 months, and liabilities of CN¥160.7m due beyond 12 months. Offsetting this, it had CN¥4.08b in cash and CN¥2.12b in receivables that were due within 12 months. So it can boast CN¥952.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Newland Digital TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Newland Digital TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Newland Digital TechnologyLtd has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. 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 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, a company can only pay off debt with cold hard cash, not accounting profits. Newland Digital TechnologyLtd 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. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Newland Digital TechnologyLtd has net cash of CN¥2.85b, as well as more liquid assets than liabilities. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in CN¥628m. So is Newland Digital TechnologyLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Newland Digital TechnologyLtd .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.