These 4 Measures Indicate That Nanjing Quanxin Cable Technology (SZSE:300447) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Nanjing Quanxin Cable Technology Co., Ltd. (SZSE:300447) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 Net Debt?

As you can see below, Nanjing Quanxin Cable Technology had CN¥49.4m of debt at June 2024, down from CN¥81.0m a year prior. But on the other hand it also has CN¥190.0m in cash, leading to a CN¥140.6m net cash position.

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

According to the last reported balance sheet, Nanjing Quanxin Cable Technology had liabilities of CN¥678.0m due within 12 months, and liabilities of CN¥13.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥190.0m as well as receivables valued at CN¥1.28b due within 12 months. So it actually has CN¥781.6m more liquid assets than total liabilities.

This excess liquidity suggests that Nanjing Quanxin Cable Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Nanjing Quanxin Cable Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Nanjing Quanxin Cable Technology's saving grace is its low debt levels, because its EBIT has tanked 57% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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. While Nanjing Quanxin Cable Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 it is always sensible to investigate a company's debt, in this case Nanjing Quanxin Cable Technology has CN¥140.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Nanjing Quanxin Cable Technology'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 1 warning sign with Nanjing Quanxin Cable Technology , and understanding them should be part of your investment process.

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.