We Think Ningbo Orient Wires & CablesLtd (SHSE:603606) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Ningbo Orient Wires & Cables Co.,Ltd. (SHSE:603606) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

As you can see below, Ningbo Orient Wires & CablesLtd had CN¥1.12b of debt at September 2024, down from CN¥1.39b a year prior. But it also has CN¥2.23b in cash to offset that, meaning it has CN¥1.11b net cash.

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. Offsetting these obligations, it had cash of CN¥2.23b as well as receivables valued at CN¥4.65b due within 12 months. So it can boast CN¥1.93b more liquid assets than total liabilities.

This short term liquidity is a sign that Ningbo Orient Wires & CablesLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

While Ningbo Orient Wires & CablesLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ningbo Orient Wires & CablesLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ningbo Orient Wires & CablesLtd 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. 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 weak cash conversion makes it more difficult to handle indebtedness.

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 don't have any problem with Ningbo Orient Wires & CablesLtd's use of debt. 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. Be aware that Ningbo Orient Wires & CablesLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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

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.