Nanjing Kangni Mechanical & ElectricalLtd (SHSE:603111) Has A Rock Solid 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.' 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 can see that Nanjing Kangni Mechanical & Electrical Co.,Ltd (SHSE:603111) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nanjing Kangni Mechanical & ElectricalLtd

How Much Debt Does Nanjing Kangni Mechanical & ElectricalLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Nanjing Kangni Mechanical & ElectricalLtd had CN¥163.1m of debt, an increase on CN¥147.0m, over one year. However, it does have CN¥1.65b in cash offsetting this, leading to net cash of CN¥1.48b.

How Healthy Is Nanjing Kangni Mechanical & ElectricalLtd's Balance Sheet?

According to the last reported balance sheet, Nanjing Kangni Mechanical & ElectricalLtd had liabilities of CN¥2.28b due within 12 months, and liabilities of CN¥187.0m due beyond 12 months. Offsetting this, it had CN¥1.65b in cash and CN¥3.37b in receivables that were due within 12 months. So it actually has CN¥2.54b more liquid assets than total liabilities.

This luscious liquidity implies that Nanjing Kangni Mechanical & ElectricalLtd's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Nanjing Kangni Mechanical & ElectricalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Nanjing Kangni Mechanical & ElectricalLtd grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nanjing Kangni Mechanical & ElectricalLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nanjing Kangni Mechanical & ElectricalLtd 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. Looking at the most recent three years, Nanjing Kangni Mechanical & ElectricalLtd recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nanjing Kangni Mechanical & ElectricalLtd has net cash of CN¥1.48b, as well as more liquid assets than liabilities. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Nanjing Kangni Mechanical & ElectricalLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Nanjing Kangni Mechanical & ElectricalLtd , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.