Is Ningbo CixingLtd (SZSE:300307) Using Too Much Debt?

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.' 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. We note that Ningbo Cixing Co.,Ltd. (SZSE:300307) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ningbo CixingLtd

How Much Debt Does Ningbo CixingLtd Carry?

As you can see below, Ningbo CixingLtd had CN¥249.9m of debt at September 2024, down from CN¥513.6m a year prior. However, it does have CN¥268.1m in cash offsetting this, leading to net cash of CN¥18.1m.

How Healthy Is Ningbo CixingLtd's Balance Sheet?

We can see from the most recent balance sheet that Ningbo CixingLtd had liabilities of CN¥1.76b falling due within a year, and liabilities of CN¥50.3m due beyond that. Offsetting this, it had CN¥268.1m in cash and CN¥1.23b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥311.9m.

Given Ningbo CixingLtd has a market capitalization of CN¥7.66b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Ningbo CixingLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Ningbo CixingLtd has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ningbo CixingLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ningbo CixingLtd 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. In the last two years, Ningbo CixingLtd's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Ningbo CixingLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥18.1m. And we liked the look of last year's 56% year-on-year EBIT growth. So is Ningbo CixingLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ningbo CixingLtd is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.