These 4 Measures Indicate That Ningbo Xusheng Group (SHSE:603305) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Ningbo Xusheng Group Co., Ltd. (SHSE:603305) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Ningbo Xusheng Group's Net Debt?

As you can see below, at the end of September 2024, Ningbo Xusheng Group had CN¥4.84b of debt, up from CN¥2.05b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.38b in cash, so it actually has CN¥540.8m net cash.

How Strong Is Ningbo Xusheng Group's Balance Sheet?

We can see from the most recent balance sheet that Ningbo Xusheng Group had liabilities of CN¥3.11b falling due within a year, and liabilities of CN¥3.67b due beyond that. Offsetting this, it had CN¥5.38b in cash and CN¥1.18b in receivables that were due within 12 months. So it has liabilities totalling CN¥216.5m more than its cash and near-term receivables, combined.

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¥13.4b 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.

View our latest analysis for Ningbo Xusheng Group

It is just as well that Ningbo Xusheng Group's load is not too heavy, because its EBIT was down 36% over the last year. 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 ultimately the future profitability of the business will decide if Ningbo Xusheng Group 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 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. Over the last three years, Ningbo Xusheng Group 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.

Summing Up

We could understand if investors are concerned about Ningbo Xusheng Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥540.8m. So while Ningbo Xusheng Group does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ningbo Xusheng Group is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.