Does Noblelift Intelligent EquipmentLtd (SHSE:603611) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Noblelift Intelligent Equipment Co.,Ltd. (SHSE:603611) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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 Noblelift Intelligent EquipmentLtd

What Is Noblelift Intelligent EquipmentLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Noblelift Intelligent EquipmentLtd had debt of CN¥1.61b, up from CN¥863.2m in one year. However, because it has a cash reserve of CN¥1.23b, its net debt is less, at about CN¥385.1m.

How Healthy Is Noblelift Intelligent EquipmentLtd's Balance Sheet?

According to the last reported balance sheet, Noblelift Intelligent EquipmentLtd had liabilities of CN¥5.55b due within 12 months, and liabilities of CN¥652.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥2.16b due within 12 months. So it has liabilities totalling CN¥2.81b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Noblelift Intelligent EquipmentLtd has a market capitalization of CN¥4.76b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Noblelift Intelligent EquipmentLtd's net debt is only 0.60 times its EBITDA. And its EBIT covers its interest expense a whopping 356 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Noblelift Intelligent EquipmentLtd'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. 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 Noblelift Intelligent EquipmentLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, Noblelift Intelligent EquipmentLtd recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

When it comes to the balance sheet, the standout positive for Noblelift Intelligent EquipmentLtd was the fact that it seems able to cover its interest expense with its EBIT confidently. But the other factors we noted above weren't so encouraging. For example, its conversion of EBIT to free cash flow makes us a little nervous about its debt. When we consider all the factors mentioned above, we do feel a bit cautious about Noblelift Intelligent EquipmentLtd's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. For example, we've discovered 2 warning signs for Noblelift Intelligent EquipmentLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

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.