Is Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005) A Risky Investment?

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.' 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 note that Ningbo Ronbay New Energy Technology Co.,Ltd. (SHSE:688005) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 March 2024 Ningbo Ronbay New Energy TechnologyLtd had CN¥6.73b of debt, an increase on CN¥5.84b, over one year. However, because it has a cash reserve of CN¥4.87b, its net debt is less, at about CN¥1.86b.

A Look At Ningbo Ronbay New Energy TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Ningbo Ronbay New Energy TechnologyLtd had liabilities of CN¥8.34b falling due within a year, and liabilities of CN¥6.00b due beyond that. Offsetting this, it had CN¥4.87b in cash and CN¥7.75b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.72b more than its cash and near-term receivables, combined.

Since publicly traded Ningbo Ronbay New Energy TechnologyLtd shares are worth a total of CN¥11.0b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Ningbo Ronbay New Energy TechnologyLtd's net debt of 2.3 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 7.2 times its interest expenses harmonizes with that theme. Shareholders should be aware that Ningbo Ronbay New Energy TechnologyLtd's EBIT was down 81% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ningbo Ronbay New Energy TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Ningbo Ronbay New Energy 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.

Our View

On the face of it, Ningbo Ronbay New Energy TechnologyLtd's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Overall, we think it's fair to say that Ningbo Ronbay New Energy TechnologyLtd has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the 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. Be aware that Ningbo Ronbay New Energy TechnologyLtd is showing 4 warning signs in our investment analysis , you should know about...

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.

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