Nanjing Quanxin Cable Technology (SZSE:300447) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Nanjing Quanxin Cable Technology Co., Ltd. (SZSE:300447) does use debt in its business. 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nanjing Quanxin Cable Technology

What Is Nanjing Quanxin Cable Technology's Debt?

The chart below, which you can click on for greater detail, shows that Nanjing Quanxin Cable Technology had CN¥49.2m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥132.6m in cash, leading to a CN¥83.4m net cash position.

How Healthy Is Nanjing Quanxin Cable Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nanjing Quanxin Cable Technology had liabilities of CN¥633.5m due within 12 months and liabilities of CN¥20.0m due beyond that. On the other hand, it had cash of CN¥132.6m and CN¥1.35b worth of receivables due within a year. So it can boast CN¥827.9m more liquid assets than total liabilities.

It's good to see that Nanjing Quanxin Cable Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Nanjing Quanxin Cable Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Nanjing Quanxin Cable Technology's saving grace is its low debt levels, because its EBIT has tanked 46% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nanjing Quanxin Cable Technology 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. Nanjing Quanxin Cable Technology 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, Nanjing Quanxin Cable Technology 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

While we empathize with investors who find debt concerning, you should keep in mind that Nanjing Quanxin Cable Technology has net cash of CN¥83.4m, as well as more liquid assets than liabilities. So we don't have any problem with Nanjing Quanxin Cable Technology's use of debt. 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 - Nanjing Quanxin Cable Technology has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.