Ningxia Qinglong Pipes Industry Group (SZSE:002457) Has A Pretty 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.' 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 Ningxia Qinglong Pipes Industry Group Co., Ltd. (SZSE:002457) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ningxia Qinglong Pipes Industry Group

What Is Ningxia Qinglong Pipes Industry Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ningxia Qinglong Pipes Industry Group had debt of CN¥733.7m, up from CN¥656.2m in one year. However, it also had CN¥540.9m in cash, and so its net debt is CN¥192.9m.

How Strong Is Ningxia Qinglong Pipes Industry Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningxia Qinglong Pipes Industry Group had liabilities of CN¥1.87b due within 12 months and liabilities of CN¥68.7m due beyond that. Offsetting these obligations, it had cash of CN¥540.9m as well as receivables valued at CN¥1.48b due within 12 months. So it can boast CN¥82.9m more liquid assets than total liabilities.

This surplus suggests that Ningxia Qinglong Pipes Industry Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Ningxia Qinglong Pipes Industry Group's net debt is only 0.81 times its EBITDA. And its EBIT covers its interest expense a whopping 24.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Ningxia Qinglong Pipes Industry Group grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ningxia Qinglong Pipes Industry Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Ningxia Qinglong Pipes Industry Group recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Ningxia Qinglong Pipes Industry Group's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Looking at the bigger picture, we think Ningxia Qinglong Pipes Industry Group's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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 2 warning signs for Ningxia Qinglong Pipes Industry Group (1 is significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.