Does Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005) Have A Healthy Balance Sheet?

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.' 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 Ronbay New Energy Technology Co.,Ltd. (SHSE:688005) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ningbo Ronbay New Energy TechnologyLtd

What Is Ningbo Ronbay New Energy TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Ningbo Ronbay New Energy TechnologyLtd had CN¥5.72b of debt, an increase on CN¥5.03b, over one year. But on the other hand it also has CN¥5.88b in cash, leading to a CN¥157.8m net cash position.

How Healthy Is Ningbo Ronbay New Energy TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningbo Ronbay New Energy TechnologyLtd had liabilities of CN¥9.05b due within 12 months and liabilities of CN¥5.38b due beyond that. Offsetting these obligations, it had cash of CN¥5.88b as well as receivables valued at CN¥7.20b due within 12 months. So its liabilities total CN¥1.34b more than the combination of its cash and short-term receivables.

Since publicly traded Ningbo Ronbay New Energy TechnologyLtd shares are worth a total of CN¥14.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Ningbo Ronbay New Energy TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Ningbo Ronbay New Energy TechnologyLtd's load is not too heavy, because its EBIT was down 55% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Ningbo Ronbay New Energy 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ningbo Ronbay New Energy 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. During the last three years, Ningbo Ronbay New Energy TechnologyLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Ningbo Ronbay New Energy TechnologyLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥157.8m. So although we see some areas for improvement, we're not too worried about Ningbo Ronbay New Energy TechnologyLtd's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ningbo Ronbay New Energy TechnologyLtd has 3 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.