Keli Sensing Technology (Ningbo)Ltd (SHSE:603662) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Keli Sensing Technology (Ningbo) Co.,Ltd. (SHSE:603662) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Keli Sensing Technology (Ningbo)Ltd

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

The chart below, which you can click on for greater detail, shows that Keli Sensing Technology (Ningbo)Ltd had CN¥657.6m in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥1.36b in cash, leading to a CN¥705.6m net cash position.

How Healthy Is Keli Sensing Technology (Ningbo)Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Keli Sensing Technology (Ningbo)Ltd had liabilities of CN¥1.17b due within 12 months and liabilities of CN¥40.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.36b as well as receivables valued at CN¥563.8m due within 12 months. So it actually has CN¥713.1m 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!

Also good is that Keli Sensing Technology (Ningbo)Ltd grew its EBIT at 10% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Keli Sensing Technology (Ningbo)Ltd can strengthen its balance sheet over time. 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. Keli Sensing Technology (Ningbo)Ltd 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. Over the last three years, Keli Sensing Technology (Ningbo)Ltd reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Keli Sensing Technology (Ningbo)Ltd has net cash of CN¥705.6m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 10% in the last twelve months. So we are not troubled with Keli Sensing Technology (Ningbo)Ltd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Keli Sensing Technology (Ningbo)Ltd .

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.