These 4 Measures Indicate That Keli Sensing Technology (Ningbo)Ltd (SHSE:603662) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. We can see that Keli Sensing Technology (Ningbo) Co.,Ltd. (SHSE:603662) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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. 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 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 Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Keli Sensing Technology (Ningbo)Ltd had debt of CN¥665.2m, up from CN¥635.2m in one year. But it also has CN¥1.19b in cash to offset that, meaning it has CN¥528.8m net cash.

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

The latest balance sheet data shows that Keli Sensing Technology (Ningbo)Ltd had liabilities of CN¥1.32b due within a year, and liabilities of CN¥52.0m falling due after that. Offsetting these obligations, it had cash of CN¥1.19b as well as receivables valued at CN¥662.6m due within 12 months. So it can boast CN¥485.0m 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. Simply put, the fact that Keli Sensing Technology (Ningbo)Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Keli Sensing Technology (Ningbo)Ltd grew its EBIT by 7.2% in the last year, making that debt load look even more manageable. 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'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. 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 2.2% 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¥528.8m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 7.2% in the last twelve months. So we don't have any problem with Keli Sensing Technology (Ningbo)Ltd's use of debt. 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. Case in point: We've spotted 2 warning signs for Keli Sensing Technology (Ningbo)Ltd you should be aware of, and 1 of them is significant.

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.