Ningbo Peacebird FashionLtd (SHSE:603877) Could Easily Take On More Debt

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 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, Ningbo Peacebird Fashion Co.,Ltd. (SHSE:603877) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ningbo Peacebird FashionLtd

What Is Ningbo Peacebird FashionLtd's Net Debt?

As you can see below, Ningbo Peacebird FashionLtd had CN¥784.9m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥2.64b in cash to offset that, meaning it has CN¥1.86b net cash.

A Look At Ningbo Peacebird FashionLtd's Liabilities

According to the last reported balance sheet, Ningbo Peacebird FashionLtd had liabilities of CN¥1.84b due within 12 months, and liabilities of CN¥1.13b due beyond 12 months. On the other hand, it had cash of CN¥2.64b and CN¥545.4m worth of receivables due within a year. So it can boast CN¥218.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Ningbo Peacebird FashionLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ningbo Peacebird FashionLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Ningbo Peacebird FashionLtd grew its EBIT by 185% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Peacebird FashionLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ningbo Peacebird FashionLtd 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. Happily for any shareholders, Ningbo Peacebird FashionLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo Peacebird FashionLtd has net cash of CN¥1.86b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥882m, being 195% of its EBIT. So we don't think Ningbo Peacebird FashionLtd's use of debt is risky. 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. For example, we've discovered 2 warning signs for Ningbo Peacebird FashionLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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