Ningbo Xusheng Group (SHSE:603305) Has A Somewhat Strained Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Ningbo Xusheng Group Co., Ltd. (SHSE:603305) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ningbo Xusheng Group

How Much Debt Does Ningbo Xusheng Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ningbo Xusheng Group had CN¥4.84b of debt, an increase on CN¥2.05b, over one year. But on the other hand it also has CN¥5.38b in cash, leading to a CN¥540.8m net cash position.

How Strong Is Ningbo Xusheng Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningbo Xusheng Group had liabilities of CN¥3.11b due within 12 months and liabilities of CN¥3.67b due beyond that. On the other hand, it had cash of CN¥5.38b and CN¥1.18b worth of receivables due within a year. So its liabilities total CN¥216.5m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Ningbo Xusheng Group'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¥14.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Ningbo Xusheng Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Ningbo Xusheng Group's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ningbo Xusheng Group'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ningbo Xusheng Group 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. During the last three years, Ningbo Xusheng Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Ningbo Xusheng Group has CN¥540.8m in net cash. So while Ningbo Xusheng Group does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Ningbo Xusheng Group is showing 2 warning signs in our investment analysis , you should know about...

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.