These 4 Measures Indicate That Ningbo Sanxing Medical ElectricLtd (SHSE:601567) Is Using Debt Safely

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.' 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. We note that Ningbo Sanxing Medical Electric Co.,Ltd. (SHSE:601567) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Ningbo Sanxing Medical ElectricLtd

How Much Debt Does Ningbo Sanxing Medical ElectricLtd Carry?

As you can see below, at the end of March 2024, Ningbo Sanxing Medical ElectricLtd had CN¥2.72b of debt, up from CN¥746.3m a year ago. Click the image for more detail. But on the other hand it also has CN¥5.24b in cash, leading to a CN¥2.53b net cash position.

A Look At Ningbo Sanxing Medical ElectricLtd's Liabilities

The latest balance sheet data shows that Ningbo Sanxing Medical ElectricLtd had liabilities of CN¥6.44b due within a year, and liabilities of CN¥3.57b falling due after that. Offsetting this, it had CN¥5.24b in cash and CN¥2.91b in receivables that were due within 12 months. So its liabilities total CN¥1.86b more than the combination of its cash and short-term receivables.

Since publicly traded Ningbo Sanxing Medical ElectricLtd shares are worth a total of CN¥48.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ningbo Sanxing Medical ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Ningbo Sanxing Medical ElectricLtd has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ningbo Sanxing Medical ElectricLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ningbo Sanxing Medical ElectricLtd 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, Ningbo Sanxing Medical ElectricLtd produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Ningbo Sanxing Medical ElectricLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.53b. And we liked the look of last year's 51% year-on-year EBIT growth. So is Ningbo Sanxing Medical ElectricLtd's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Ningbo Sanxing Medical ElectricLtd .

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.