Here's Why Keli Sensing Technology (Ningbo)Ltd (SHSE:603662) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Keli Sensing Technology (Ningbo) Co.,Ltd. (SHSE:603662) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Keli Sensing Technology (Ningbo)Ltd

What Is Keli Sensing Technology (Ningbo)Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that Keli Sensing Technology (Ningbo)Ltd had CN¥670.1m of debt in June 2024, down from CN¥721.9m, one year before. But it also has CN¥1.36b in cash to offset that, meaning it has CN¥691.7m net cash.

A Look At Keli Sensing Technology (Ningbo)Ltd's Liabilities

The latest balance sheet data shows that Keli Sensing Technology (Ningbo)Ltd had liabilities of CN¥1.25b due within a year, and liabilities of CN¥42.0m falling due after that. Offsetting this, it had CN¥1.36b in cash and CN¥596.8m in receivables that were due within 12 months. So it actually has CN¥671.1m more liquid assets than total liabilities.

This surplus suggests that Keli Sensing Technology (Ningbo)Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Keli Sensing Technology (Ningbo)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Keli Sensing Technology (Ningbo)Ltd has increased its EBIT by 3.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Keli Sensing Technology (Ningbo)Ltd'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. While Keli Sensing Technology (Ningbo)Ltd 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, Keli Sensing Technology (Ningbo)Ltd created free cash flow amounting to 6.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Keli Sensing Technology (Ningbo)Ltd has CN¥691.7m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 3.2% over the last year. So we don't have any problem with Keli Sensing Technology (Ningbo)Ltd'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. Case in point: We've spotted 3 warning signs for Keli Sensing Technology (Ningbo)Ltd 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.