We Think RongFa Nuclear Equipment (SZSE:002366) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, RongFa Nuclear Equipment Co., Ltd. (SZSE:002366) does carry 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for RongFa Nuclear Equipment

How Much Debt Does RongFa Nuclear Equipment Carry?

As you can see below, at the end of March 2024, RongFa Nuclear Equipment had CN¥1.72b of debt, up from CN¥130.0m a year ago. Click the image for more detail. However, it also had CN¥1.72b in cash, and so its net debt is CN¥292.0k.

How Healthy Is RongFa Nuclear Equipment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RongFa Nuclear Equipment had liabilities of CN¥1.09b due within 12 months and liabilities of CN¥1.97b due beyond that. On the other hand, it had cash of CN¥1.72b and CN¥1.31b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to RongFa Nuclear Equipment's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥7.80b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, RongFa Nuclear Equipment has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is RongFa Nuclear Equipment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year RongFa Nuclear Equipment wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to CN¥807m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though RongFa Nuclear Equipment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥41m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥2.2b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for RongFa Nuclear Equipment (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com