Ningbo Huaxiang Electronic (SZSE:002048) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Huaxiang Electronic Co., Ltd. (SZSE:002048) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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.

See our latest analysis for Ningbo Huaxiang Electronic

What Is Ningbo Huaxiang Electronic's Net Debt?

As you can see below, at the end of September 2024, Ningbo Huaxiang Electronic had CN¥1.19b of debt, up from CN¥1.05b a year ago. Click the image for more detail. But it also has CN¥2.48b in cash to offset that, meaning it has CN¥1.30b net cash.

A Look At Ningbo Huaxiang Electronic's Liabilities

We can see from the most recent balance sheet that Ningbo Huaxiang Electronic had liabilities of CN¥13.1b falling due within a year, and liabilities of CN¥2.28b due beyond that. Offsetting this, it had CN¥2.48b in cash and CN¥8.63b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.31b.

Ningbo Huaxiang Electronic has a market capitalization of CN¥10.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Ningbo Huaxiang Electronic boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Ningbo Huaxiang Electronic grew its EBIT by 16% last year, making its debt load easier to handle. 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 Huaxiang Electronic'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. While Ningbo Huaxiang Electronic 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. Looking at the most recent three years, Ningbo Huaxiang Electronic recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Ningbo Huaxiang Electronic's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.30b. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't have any problem with Ningbo Huaxiang Electronic's use of debt. 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 Huaxiang Electronic is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.