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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Delixi New Energy Technology Co., Ltd. (SHSE:603032) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Delixi New Energy Technology

What Is Delixi New Energy Technology's Debt?

As you can see below, Delixi New Energy Technology had CN¥153.0m of debt at September 2023, down from CN¥206.2m a year prior. However, its balance sheet shows it holds CN¥355.5m in cash, so it actually has CN¥202.5m net cash.

How Healthy Is Delixi New Energy Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Delixi New Energy Technology had liabilities of CN¥150.9m due within 12 months and liabilities of CN¥279.3m due beyond that. Offsetting this, it had CN¥355.5m in cash and CN¥402.9m in receivables that were due within 12 months. So it actually has CN¥328.3m more liquid assets than total liabilities.

This surplus suggests that Delixi New Energy Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Delixi New Energy Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Delixi New Energy Technology grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Delixi New Energy 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 company can only pay off debt with cold hard cash, not accounting profits. Delixi New Energy 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. Over the most recent three years, Delixi New Energy Technology recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Delixi New Energy Technology has net cash of CN¥202.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't think Delixi New Energy Technology's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Delixi New Energy Technology .

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.