Is Shenzhen Newway Photomask Making (SHSE:688401) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shenzhen Newway Photomask Making Co., Ltd (SHSE:688401) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Shenzhen Newway Photomask Making

What Is Shenzhen Newway Photomask Making's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shenzhen Newway Photomask Making had CN¥397.5m of debt, an increase on CN¥313.1m, over one year. But it also has CN¥511.1m in cash to offset that, meaning it has CN¥113.6m net cash.

How Strong Is Shenzhen Newway Photomask Making's Balance Sheet?

According to the last reported balance sheet, Shenzhen Newway Photomask Making had liabilities of CN¥169.6m due within 12 months, and liabilities of CN¥429.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥511.1m as well as receivables valued at CN¥167.8m due within 12 months. So it can boast CN¥80.1m more liquid assets than total liabilities.

Having regard to Shenzhen Newway Photomask Making's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.44b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Shenzhen Newway Photomask Making has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shenzhen Newway Photomask Making has boosted its EBIT by 37%, 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 Shenzhen Newway Photomask Making 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. Shenzhen Newway Photomask Making 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, Shenzhen Newway Photomask Making created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Newway Photomask Making has net cash of CN¥113.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 37% year-on-year EBIT growth. So is Shenzhen Newway Photomask Making's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Shenzhen Newway Photomask Making, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.