We Think Runner (Xiamen) (SHSE:603408) Can Manage Its Debt With Ease

Warren Buffett famously said, '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. Importantly, Runner (Xiamen) Corp. (SHSE:603408) does carry debt. But is this debt a concern to shareholders?

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. 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, 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.

View our latest analysis for Runner (Xiamen)

What Is Runner (Xiamen)'s Debt?

The image below, which you can click on for greater detail, shows that Runner (Xiamen) had debt of CN¥190.4m at the end of June 2024, a reduction from CN¥232.2m over a year. But on the other hand it also has CN¥1.10b in cash, leading to a CN¥909.6m net cash position.

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

The latest balance sheet data shows that Runner (Xiamen) had liabilities of CN¥1.42b due within a year, and liabilities of CN¥88.0m falling due after that. On the other hand, it had cash of CN¥1.10b and CN¥1.18b worth of receivables due within a year. So it can boast CN¥780.3m 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. Simply put, the fact that Runner (Xiamen) has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Runner (Xiamen) grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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'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. 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. Over the most recent three years, Runner (Xiamen) recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Runner (Xiamen) has net cash of CN¥909.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 83% year-on-year EBIT growth. So we don't think Runner (Xiamen)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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.