WuXi Xinje ElectricLtd (SHSE:603416) Could Easily Take On More 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, WuXi Xinje Electric Co.,Ltd. (SHSE:603416) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for WuXi Xinje ElectricLtd

What Is WuXi Xinje ElectricLtd's Net Debt?

As you can see below, WuXi Xinje ElectricLtd had CN¥33.0m of debt at September 2024, down from CN¥110.0m a year prior. But it also has CN¥1.05b in cash to offset that, meaning it has CN¥1.01b net cash.

A Look At WuXi Xinje ElectricLtd's Liabilities

We can see from the most recent balance sheet that WuXi Xinje ElectricLtd had liabilities of CN¥885.3m falling due within a year, and liabilities of CN¥31.3m due beyond that. Offsetting this, it had CN¥1.05b in cash and CN¥526.2m in receivables that were due within 12 months. So it can boast CN¥656.6m more liquid assets than total liabilities.

This surplus suggests that WuXi Xinje ElectricLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, WuXi Xinje ElectricLtd 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 WuXi Xinje ElectricLtd has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WuXi Xinje ElectricLtd can strengthen its balance sheet over time. 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 WuXi Xinje ElectricLtd 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. Over the most recent three years, WuXi Xinje ElectricLtd recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi Xinje ElectricLtd has CN¥1.01b in net cash and a decent-looking balance sheet. And we liked the look of last year's 35% year-on-year EBIT growth. So is WuXi Xinje ElectricLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of WuXi Xinje ElectricLtd's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.