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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Neway CNC Equipment (Suzhou) Co., Ltd. (SHSE:688697) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Neway CNC Equipment (Suzhou) Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Neway CNC Equipment (Suzhou) had debt of CN¥829.7m, up from CN¥722.4m in one year. But on the other hand it also has CN¥1.29b in cash, leading to a CN¥455.6m net cash position.

A Look At Neway CNC Equipment (Suzhou)'s Liabilities

The latest balance sheet data shows that Neway CNC Equipment (Suzhou) had liabilities of CN¥2.02b due within a year, and liabilities of CN¥28.0m falling due after that. On the other hand, it had cash of CN¥1.29b and CN¥820.2m worth of receivables due within a year. So it actually has CN¥60.2m more liquid assets than total liabilities.

This state of affairs indicates that Neway CNC Equipment (Suzhou)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.56b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Neway CNC Equipment (Suzhou) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Neway CNC Equipment (Suzhou) grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Neway CNC Equipment (Suzhou) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Neway CNC Equipment (Suzhou) 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 most recent three years, Neway CNC Equipment (Suzhou) recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Neway CNC Equipment (Suzhou) has net cash of CN¥455.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is Neway CNC Equipment (Suzhou)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Neway CNC Equipment (Suzhou) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.