Does Ningbo Tuopu GroupLtd (SHSE:601689) Have A Healthy 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.' 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. We note that Ningbo Tuopu Group Co.,Ltd. (SHSE:601689) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ningbo Tuopu GroupLtd

How Much Debt Does Ningbo Tuopu GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Ningbo Tuopu GroupLtd had debt of CN¥7.08b, up from CN¥5.95b in one year. However, because it has a cash reserve of CN¥3.76b, its net debt is less, at about CN¥3.32b.

A Look At Ningbo Tuopu GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Ningbo Tuopu GroupLtd had liabilities of CN¥11.3b due within 12 months and liabilities of CN¥4.55b due beyond that. Offsetting these obligations, it had cash of CN¥3.76b as well as receivables valued at CN¥8.35b due within 12 months. So it has liabilities totalling CN¥3.71b more than its cash and near-term receivables, combined.

Of course, Ningbo Tuopu GroupLtd has a titanic market capitalization of CN¥123.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Ningbo Tuopu GroupLtd has a low net debt to EBITDA ratio of only 0.73. And its EBIT easily covers its interest expense, being 22.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Ningbo Tuopu GroupLtd grew its EBIT by 31% 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 Ningbo Tuopu GroupLtd 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Ningbo Tuopu GroupLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

The good news is that Ningbo Tuopu GroupLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Ningbo Tuopu GroupLtd can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. Be aware that Ningbo Tuopu GroupLtd is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.