NARI Technology (SHSE:600406) Could Easily Take On More Debt

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.' 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. As with many other companies NARI Technology Co., Ltd. (SHSE:600406) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for NARI Technology

What Is NARI Technology's Net Debt?

The image below, which you can click on for greater detail, shows that NARI Technology had debt of CN¥618.2m at the end of March 2024, a reduction from CN¥1.39b over a year. However, its balance sheet shows it holds CN¥20.6b in cash, so it actually has CN¥20.0b net cash.

A Look At NARI Technology's Liabilities

We can see from the most recent balance sheet that NARI Technology had liabilities of CN¥31.6b falling due within a year, and liabilities of CN¥616.4m due beyond that. Offsetting these obligations, it had cash of CN¥20.6b as well as receivables valued at CN¥30.1b due within 12 months. So it can boast CN¥18.5b more liquid assets than total liabilities.

This surplus suggests that NARI Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NARI Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, NARI Technology grew its EBIT by 7.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NARI Technology 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. NARI Technology 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. During the last three years, NARI Technology generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case NARI Technology has CN¥20.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥11b, being 83% of its EBIT. So we don't think NARI Technology's use of debt is risky. 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. For example - NARI Technology has 1 warning sign we think you should be aware of.

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.