Ningbo BaoSi Energy Equipment (SZSE:300441) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ningbo BaoSi Energy Equipment Co., Ltd. (SZSE:300441) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Ningbo BaoSi Energy Equipment

What Is Ningbo BaoSi Energy Equipment's Net Debt?

As you can see below, Ningbo BaoSi Energy Equipment had CN¥519.1m of debt at December 2023, down from CN¥550.8m a year prior. However, it does have CN¥333.8m in cash offsetting this, leading to net debt of about CN¥185.3m.

How Healthy Is Ningbo BaoSi Energy Equipment's Balance Sheet?

We can see from the most recent balance sheet that Ningbo BaoSi Energy Equipment had liabilities of CN¥1.16b falling due within a year, and liabilities of CN¥222.7m due beyond that. Offsetting this, it had CN¥333.8m in cash and CN¥722.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥325.7m more than its cash and near-term receivables, combined.

Given Ningbo BaoSi Energy Equipment has a market capitalization of CN¥4.49b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Ningbo BaoSi Energy Equipment has a low net debt to EBITDA ratio of only 0.34. And its EBIT covers its interest expense a whopping 26.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that Ningbo BaoSi Energy Equipment has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. 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 BaoSi Energy Equipment's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Ningbo BaoSi Energy Equipment created free cash flow amounting to 10% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

The good news is that Ningbo BaoSi Energy Equipment's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Taking all this data into account, it seems to us that Ningbo BaoSi Energy Equipment takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. 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. For instance, we've identified 1 warning sign for Ningbo BaoSi Energy Equipment that you should be aware of.

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.