We Think Ningbo Deye Technology Group (SHSE:605117) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ningbo Deye Technology Group Co., Ltd. (SHSE:605117) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ningbo Deye Technology Group

What Is Ningbo Deye Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Ningbo Deye Technology Group had CN¥1.60b of debt in September 2024, down from CN¥2.44b, one year before. However, its balance sheet shows it holds CN¥6.56b in cash, so it actually has CN¥4.96b net cash.

How Healthy Is Ningbo Deye Technology Group's Balance Sheet?

According to the last reported balance sheet, Ningbo Deye Technology Group had liabilities of CN¥5.74b due within 12 months, and liabilities of CN¥140.4m due beyond 12 months. On the other hand, it had cash of CN¥6.56b and CN¥1.96b worth of receivables due within a year. So it can boast CN¥2.63b more liquid assets than total liabilities.

This short term liquidity is a sign that Ningbo Deye Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ningbo Deye Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Ningbo Deye Technology Group saw its EBIT decline by 3.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ningbo Deye Technology Group'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 company can only pay off debt with cold hard cash, not accounting profits. While Ningbo Deye Technology Group 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. Over the last three years, Ningbo Deye Technology Group recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo Deye Technology Group has net cash of CN¥4.96b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥2.0b. So is Ningbo Deye Technology Group'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 Ningbo Deye Technology Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.