Ningbo Fujia Industrial (SHSE:603219) 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.' 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 Fujia Industrial Co., Ltd. (SHSE:603219) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ningbo Fujia Industrial

What Is Ningbo Fujia Industrial's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ningbo Fujia Industrial had debt of CN¥255.0m, up from CN¥153.1m in one year. However, it does have CN¥565.1m in cash offsetting this, leading to net cash of CN¥310.1m.

How Healthy Is Ningbo Fujia Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningbo Fujia Industrial had liabilities of CN¥1.35b due within 12 months and liabilities of CN¥32.1m due beyond that. On the other hand, it had cash of CN¥565.1m and CN¥921.0m worth of receivables due within a year. So it can boast CN¥103.4m more liquid assets than total liabilities.

This state of affairs indicates that Ningbo Fujia Industrial's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥10.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Ningbo Fujia Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Ningbo Fujia Industrial's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ningbo Fujia Industrial's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ningbo Fujia Industrial 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. During the last three years, Ningbo Fujia Industrial generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo Fujia Industrial has net cash of CN¥310.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in CN¥123m. So we don't have any problem with Ningbo Fujia Industrial's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Ningbo Fujia Industrial that you should be aware of before investing here.

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.