These 4 Measures Indicate That North Industries Group Red Arrow (SZSE:000519) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies North Industries Group Red Arrow Co., Ltd (SZSE:000519) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for North Industries Group Red Arrow

What Is North Industries Group Red Arrow's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 North Industries Group Red Arrow had CN¥880.0m of debt, an increase on CN¥326.2m, over one year. But it also has CN¥5.50b in cash to offset that, meaning it has CN¥4.62b net cash.

How Strong Is North Industries Group Red Arrow's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that North Industries Group Red Arrow had liabilities of CN¥4.34b due within 12 months and liabilities of CN¥807.3m due beyond that. Offsetting this, it had CN¥5.50b in cash and CN¥2.23b in receivables that were due within 12 months. So it can boast CN¥2.58b more liquid assets than total liabilities.

This surplus suggests that North Industries Group Red Arrow has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that North Industries Group Red Arrow has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that North Industries Group Red Arrow grew its EBIT by 592% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if North Industries Group Red Arrow 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. North Industries Group Red Arrow 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, North Industries Group Red Arrow burned a lot of cash. 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 North Industries Group Red Arrow has net cash of CN¥4.62b, as well as more liquid assets than liabilities. And we liked the look of last year's 592% year-on-year EBIT growth. So we are not troubled with North Industries Group Red Arrow's debt use. 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 North Industries Group Red Arrow that 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.