Here's Why Nancal TechnologyLtd (SHSE:603859) Can Manage Its Debt Responsibly

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.' 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. We note that Nancal Technology Co.,Ltd (SHSE:603859) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nancal TechnologyLtd

How Much Debt Does Nancal TechnologyLtd Carry?

As you can see below, at the end of September 2023, Nancal TechnologyLtd had CN¥81.9m of debt, up from CN¥53.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥351.2m in cash, leading to a CN¥269.3m net cash position.

How Strong Is Nancal TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nancal TechnologyLtd had liabilities of CN¥679.7m due within 12 months and liabilities of CN¥85.9m due beyond that. Offsetting this, it had CN¥351.2m in cash and CN¥1.49b in receivables that were due within 12 months. So it actually has CN¥1.07b more liquid assets than total liabilities.

This surplus suggests that Nancal TechnologyLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Nancal TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Nancal TechnologyLtd grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nancal TechnologyLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Nancal TechnologyLtd 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, Nancal TechnologyLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nancal TechnologyLtd has net cash of CN¥269.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 76% year-on-year EBIT growth. So is Nancal TechnologyLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Nancal TechnologyLtd, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.