Does Runner (Xiamen) (SHSE:603408) Have A Healthy Balance Sheet?

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 Runner (Xiamen) Corp. (SHSE:603408) makes use of debt. 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Runner (Xiamen)

What Is Runner (Xiamen)'s Net Debt?

The image below, which you can click on for greater detail, shows that Runner (Xiamen) had debt of CN¥190.7m at the end of March 2024, a reduction from CN¥241.4m over a year. But it also has CN¥1.24b in cash to offset that, meaning it has CN¥1.05b net cash.

How Healthy Is Runner (Xiamen)'s Balance Sheet?

According to the last reported balance sheet, Runner (Xiamen) had liabilities of CN¥1.35b due within 12 months, and liabilities of CN¥80.5m due beyond 12 months. On the other hand, it had cash of CN¥1.24b and CN¥1.08b worth of receivables due within a year. So it actually has CN¥887.7m more liquid assets than total liabilities.

This surplus suggests that Runner (Xiamen) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Runner (Xiamen) 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 Runner (Xiamen) has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Runner (Xiamen)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Runner (Xiamen) 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. During the last three years, Runner (Xiamen) produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Runner (Xiamen) has CN¥1.05b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 60% over the last year. So we don't think Runner (Xiamen)'s use of debt is risky. 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. For instance, we've identified 1 warning sign for Runner (Xiamen) that 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.