We Think Ningbo CixingLtd (SZSE:300307) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Ningbo Cixing Co.,Ltd. (SZSE:300307) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ningbo CixingLtd

How Much Debt Does Ningbo CixingLtd Carry?

As you can see below, Ningbo CixingLtd had CN¥295.8m of debt at June 2024, down from CN¥476.6m a year prior. However, its balance sheet shows it holds CN¥610.8m in cash, so it actually has CN¥315.0m net cash.

How Healthy Is Ningbo CixingLtd's Balance Sheet?

According to the last reported balance sheet, Ningbo CixingLtd had liabilities of CN¥1.73b due within 12 months, and liabilities of CN¥44.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥610.8m as well as receivables valued at CN¥1.01b due within 12 months. So its liabilities total CN¥150.0m more than the combination of its cash and short-term receivables.

Given Ningbo CixingLtd has a market capitalization of CN¥5.36b, 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. While it does have liabilities worth noting, Ningbo CixingLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Ningbo CixingLtd grew its EBIT by 51% 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 it is Ningbo CixingLtd's earnings that will influence how the balance sheet holds up in the future. 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.

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. Over the last three years, Ningbo CixingLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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¥315.0m. And we liked the look of last year's 51% year-on-year EBIT growth. So we are not troubled with Ningbo CixingLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Ningbo CixingLtd you should know about.

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.