Daxin Materials (TWSE:5234) Has A Rock Solid Balance Sheet

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 Daxin Materials Corporation (TWSE:5234) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Daxin Materials

How Much Debt Does Daxin Materials Carry?

You can click the graphic below for the historical numbers, but it shows that Daxin Materials had NT$306.9m of debt in June 2024, down from NT$433.2m, one year before. However, it does have NT$1.54b in cash offsetting this, leading to net cash of NT$1.24b.

A Look At Daxin Materials' Liabilities

We can see from the most recent balance sheet that Daxin Materials had liabilities of NT$1.42b falling due within a year, and liabilities of NT$367.9m due beyond that. Offsetting these obligations, it had cash of NT$1.54b as well as receivables valued at NT$1.10b due within 12 months. So it actually has NT$857.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Daxin Materials could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Daxin Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Daxin Materials grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Daxin Materials 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. While Daxin Materials 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. Over the last three years, Daxin Materials recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Daxin Materials has NT$1.24b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in NT$841m. So we don't think Daxin Materials's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Daxin Materials has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.