Here's Why Nancal TechnologyLtd (SHSE:603859) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Nancal Technology Co.,Ltd (SHSE:603859) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Nancal TechnologyLtd

What Is Nancal TechnologyLtd's Debt?

As you can see below, at the end of September 2024, Nancal TechnologyLtd had CN¥196.3m of debt, up from CN¥81.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥609.5m in cash, so it actually has CN¥413.2m net cash.

How Healthy Is Nancal TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nancal TechnologyLtd had liabilities of CN¥1.21b due within 12 months and liabilities of CN¥93.6m due beyond that. Offsetting this, it had CN¥609.5m in cash and CN¥1.63b in receivables that were due within 12 months. So it can boast CN¥931.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Nancal TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nancal TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Nancal TechnologyLtd's load is not too heavy, because its EBIT was down 36% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nancal TechnologyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nancal TechnologyLtd 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. Considering the last three years, Nancal TechnologyLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nancal TechnologyLtd has net cash of CN¥413.2m, as well as more liquid assets than liabilities. So while Nancal TechnologyLtd does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 1 warning sign for Nancal TechnologyLtd that you should be aware of.

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.