Ningbo Peacebird FashionLtd (SHSE:603877) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ningbo Peacebird Fashion Co.,Ltd. (SHSE:603877) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ningbo Peacebird FashionLtd

What Is Ningbo Peacebird FashionLtd's Debt?

As you can see below, Ningbo Peacebird FashionLtd had CN¥798.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥1.82b in cash to offset that, meaning it has CN¥1.02b net cash.

How Strong Is Ningbo Peacebird FashionLtd's Balance Sheet?

The latest balance sheet data shows that Ningbo Peacebird FashionLtd had liabilities of CN¥2.15b due within a year, and liabilities of CN¥1.35b falling due after that. Offsetting these obligations, it had cash of CN¥1.82b as well as receivables valued at CN¥640.1m due within 12 months. So its liabilities total CN¥1.04b more than the combination of its cash and short-term receivables.

Given Ningbo Peacebird FashionLtd has a market capitalization of CN¥6.73b, 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. While it does have liabilities worth noting, Ningbo Peacebird FashionLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Ningbo Peacebird FashionLtd has boosted its EBIT by 79%, 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 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Ningbo Peacebird FashionLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Ningbo Peacebird FashionLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.02b. The cherry on top was that in converted 284% of that EBIT to free cash flow, bringing in CN¥582m. So we don't think Ningbo Peacebird FashionLtd's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Ningbo Peacebird FashionLtd .

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.