Ningbo Orient Wires & CablesLtd (SHSE:603606) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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 Ningbo Orient Wires & Cables Co.,Ltd. (SHSE:603606) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ningbo Orient Wires & CablesLtd

How Much Debt Does Ningbo Orient Wires & CablesLtd Carry?

The chart below, which you can click on for greater detail, shows that Ningbo Orient Wires & CablesLtd had CN¥1.09b in debt in March 2024; about the same as the year before. However, it does have CN¥2.42b in cash offsetting this, leading to net cash of CN¥1.33b.

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

According to the last reported balance sheet, Ningbo Orient Wires & CablesLtd had liabilities of CN¥4.04b due within 12 months, and liabilities of CN¥817.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.42b as well as receivables valued at CN¥3.43b due within 12 months. So it can boast CN¥990.6m 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. Simply put, the fact that Ningbo Orient Wires & CablesLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Ningbo Orient Wires & CablesLtd grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 20% 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¥1.33b, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we are not troubled with Ningbo Orient Wires & CablesLtd's debt use. 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 Ningbo Orient Wires & CablesLtd , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com