Is Changzhou Nrb (SZSE:002708) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Changzhou Nrb Corporation (SZSE:002708) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Changzhou Nrb

What Is Changzhou Nrb's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Changzhou Nrb had CN¥757.1m of debt, an increase on CN¥708.2m, over one year. However, because it has a cash reserve of CN¥446.5m, its net debt is less, at about CN¥310.6m.

How Strong Is Changzhou Nrb's Balance Sheet?

The latest balance sheet data shows that Changzhou Nrb had liabilities of CN¥1.45b due within a year, and liabilities of CN¥90.8m falling due after that. Offsetting this, it had CN¥446.5m in cash and CN¥932.1m in receivables that were due within 12 months. So its liabilities total CN¥166.4m more than the combination of its cash and short-term receivables.

Since publicly traded Changzhou Nrb shares are worth a total of CN¥6.53b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Changzhou Nrb will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Changzhou Nrb wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to CN¥2.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Changzhou Nrb's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥34m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥167m of cash over the last year. So to be blunt we think it is risky. 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. For example, we've discovered 1 warning sign for Changzhou Nrb that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.