We Think Newcapec Electronics (SZSE:300248) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Newcapec Electronics Co., Ltd. (SZSE:300248) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Newcapec Electronics

What Is Newcapec Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Newcapec Electronics had CN¥116.7m of debt in September 2024, down from CN¥134.3m, one year before. However, its balance sheet shows it holds CN¥243.8m in cash, so it actually has CN¥127.1m net cash.

How Healthy Is Newcapec Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Newcapec Electronics had liabilities of CN¥349.6m due within 12 months and liabilities of CN¥56.9m due beyond that. Offsetting these obligations, it had cash of CN¥243.8m as well as receivables valued at CN¥776.9m due within 12 months. So it can boast CN¥614.2m more liquid assets than total liabilities.

This surplus suggests that Newcapec Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Newcapec Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Newcapec Electronics saw its EBIT decline by 5.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Newcapec Electronics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Newcapec Electronics 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. Over the last three years, Newcapec Electronics recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Newcapec Electronics has net cash of CN¥127.1m, as well as more liquid assets than liabilities. So we are not troubled with Newcapec Electronics's debt use. 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. Case in point: We've spotted 3 warning signs for Newcapec Electronics you should be aware of, and 2 of them shouldn't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.