Is Ningbo ZhongDa Leader Intelligent Transmission (SZSE:002896) Using Too Much Debt?

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.' 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. As with many other companies Ningbo ZhongDa Leader Intelligent Transmission Co., Ltd. (SZSE:002896) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 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 Ningbo ZhongDa Leader Intelligent Transmission

What Is Ningbo ZhongDa Leader Intelligent Transmission's Debt?

The image below, which you can click on for greater detail, shows that Ningbo ZhongDa Leader Intelligent Transmission had debt of CN¥80.1m at the end of September 2024, a reduction from CN¥140.3m over a year. However, its balance sheet shows it holds CN¥98.7m in cash, so it actually has CN¥18.7m net cash.

A Look At Ningbo ZhongDa Leader Intelligent Transmission's Liabilities

Zooming in on the latest balance sheet data, we can see that Ningbo ZhongDa Leader Intelligent Transmission had liabilities of CN¥340.3m due within 12 months and liabilities of CN¥96.8m due beyond that. Offsetting this, it had CN¥98.7m in cash and CN¥280.7m in receivables that were due within 12 months. So its liabilities total CN¥57.7m more than the combination of its cash and short-term receivables.

Having regard to Ningbo ZhongDa Leader Intelligent Transmission's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.85b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Ningbo ZhongDa Leader Intelligent Transmission boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Ningbo ZhongDa Leader Intelligent Transmission grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ningbo ZhongDa Leader Intelligent Transmission's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ningbo ZhongDa Leader Intelligent Transmission 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. Considering the last three years, Ningbo ZhongDa Leader Intelligent Transmission actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Ningbo ZhongDa Leader Intelligent Transmission's liabilities, but we can be reassured by the fact it has has net cash of CN¥18.7m. And it also grew its EBIT by 15% over the last year. So we don't have any problem with Ningbo ZhongDa Leader Intelligent Transmission's use of debt. 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. We've identified 2 warning signs with Ningbo ZhongDa Leader Intelligent Transmission , and understanding them should be part of your investment process.

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.