Maxvision Technology (SZSE:002990) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Maxvision Technology Corp. (SZSE:002990) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Maxvision Technology

What Is Maxvision Technology's Net Debt?

As you can see below, at the end of September 2023, Maxvision Technology had CN¥12.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.16b in cash, so it actually has CN¥1.14b net cash.

A Look At Maxvision Technology's Liabilities

We can see from the most recent balance sheet that Maxvision Technology had liabilities of CN¥1.11b falling due within a year, and liabilities of CN¥73.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.16b as well as receivables valued at CN¥1.34b due within 12 months. So it actually has CN¥1.31b more liquid assets than total liabilities.

It's good to see that Maxvision Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Maxvision Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Maxvision Technology grew its EBIT by 144% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Maxvision Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Maxvision Technology 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. In the last three years, Maxvision Technology's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Maxvision Technology has net cash of CN¥1.14b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 144% over the last year. So we don't think Maxvision Technology's use of debt is risky. 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 Maxvision Technology's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.