Here's Why Urovo Technology (SZSE:300531) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Urovo Technology Co., Ltd. (SZSE:300531) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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.

View our latest analysis for Urovo Technology

What Is Urovo Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Urovo Technology had CN¥582.5m of debt, an increase on CN¥430.3m, over one year. However, it does have CN¥1.17b in cash offsetting this, leading to net cash of CN¥583.8m.

How Strong Is Urovo Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Urovo Technology had liabilities of CN¥795.0m due within 12 months and liabilities of CN¥32.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.17b as well as receivables valued at CN¥331.9m due within 12 months. So it can boast CN¥671.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Urovo Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Urovo Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Urovo Technology's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Urovo Technology'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Urovo Technology 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. Happily for any shareholders, Urovo Technology actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Urovo Technology has CN¥583.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥134m, being 181% of its EBIT. So we don't have any problem with Urovo Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Urovo Technology you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.