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, Shenzhen Newway Photomask Making Co., Ltd (SHSE:688401) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen Newway Photomask Making's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Newway Photomask Making had debt of CN¥397.5m, up from CN¥313.1m in one year. But on the other hand it also has CN¥511.1m in cash, leading to a CN¥113.6m net cash position.

How Healthy Is Shenzhen Newway Photomask Making's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Newway Photomask Making had liabilities of CN¥169.6m falling due within a year, and liabilities of CN¥429.1m due beyond that. On the other hand, it had cash of CN¥511.1m and CN¥167.8m worth of receivables due within a year. So it can boast CN¥80.1m more liquid assets than total liabilities.

This state of affairs indicates that Shenzhen Newway Photomask Making's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥5.12b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shenzhen Newway Photomask Making has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shenzhen Newway Photomask Making grew its EBIT by 37% 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 ultimately the future profitability of the business will decide if Shenzhen Newway Photomask Making can strengthen its balance sheet over time. 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. Shenzhen Newway Photomask Making 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, Shenzhen Newway Photomask Making reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Newway Photomask Making has net cash of CN¥113.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 37% year-on-year EBIT growth. So is Shenzhen Newway Photomask Making's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenzhen Newway Photomask Making's earnings per share history for free.

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.