Is Ningbo Orient Wires & CablesLtd (SHSE:603606) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Ningbo Orient Wires & Cables Co.,Ltd. (SHSE:603606) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Orient Wires & CablesLtd

What Is Ningbo Orient Wires & CablesLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ningbo Orient Wires & CablesLtd had CN¥1.12b of debt in September 2024, down from CN¥1.39b, one year before. However, it does have CN¥2.23b in cash offsetting this, leading to net cash of CN¥1.11b.

How Strong Is Ningbo Orient Wires & CablesLtd's Balance Sheet?

We can see from the most recent balance sheet that Ningbo Orient Wires & CablesLtd had liabilities of CN¥4.22b falling due within a year, and liabilities of CN¥730.7m due beyond that. On the other hand, it had cash of CN¥2.23b and CN¥4.65b worth of receivables due within a year. So it actually has CN¥1.93b more liquid assets than total liabilities.

This surplus suggests that Ningbo Orient Wires & CablesLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ningbo Orient Wires & CablesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Ningbo Orient Wires & CablesLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Orient Wires & CablesLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ningbo Orient Wires & CablesLtd 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. In the last three years, Ningbo Orient Wires & CablesLtd's free cash flow amounted to 35% of its EBIT, less 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 Ningbo Orient Wires & CablesLtd has net cash of CN¥1.11b, as well as more liquid assets than liabilities. So we are not troubled with Ningbo Orient Wires & CablesLtd's debt use. 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. Case in point: We've spotted 1 warning sign for Ningbo Orient Wires & CablesLtd you should be aware of.

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.