WuXi Xinje ElectricLtd (SHSE:603416) 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. We can see that WuXi Xinje Electric Co.,Ltd. (SHSE:603416) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for WuXi Xinje ElectricLtd

What Is WuXi Xinje ElectricLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 WuXi Xinje ElectricLtd had CN¥183.0m of debt, an increase on CN¥20.0m, over one year. However, its balance sheet shows it holds CN¥1.25b in cash, so it actually has CN¥1.06b net cash.

A Look At WuXi Xinje ElectricLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that WuXi Xinje ElectricLtd had liabilities of CN¥837.4m due within 12 months and liabilities of CN¥32.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.25b as well as receivables valued at CN¥433.6m due within 12 months. So it actually has CN¥809.5m more liquid assets than total liabilities.

This excess liquidity suggests that WuXi Xinje ElectricLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, WuXi Xinje ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that WuXi Xinje ElectricLtd grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine WuXi Xinje ElectricLtd'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. WuXi Xinje ElectricLtd 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. In the last three years, WuXi Xinje ElectricLtd's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi Xinje ElectricLtd has CN¥1.06b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 14% over the last year. So is WuXi Xinje ElectricLtd'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. For instance, we've identified 1 warning sign for WuXi Xinje ElectricLtd that you should be aware of.

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.