Namchow Food Group (Shanghai) (SHSE:605339) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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. We note that Namchow Food Group (Shanghai) Co., Ltd. (SHSE:605339) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Namchow Food Group (Shanghai)

What Is Namchow Food Group (Shanghai)'s Debt?

As you can see below, Namchow Food Group (Shanghai) had CN¥251.5m of debt at September 2024, down from CN¥320.2m a year prior. But it also has CN¥1.59b in cash to offset that, meaning it has CN¥1.34b net cash.

A Look At Namchow Food Group (Shanghai)'s Liabilities

According to the last reported balance sheet, Namchow Food Group (Shanghai) had liabilities of CN¥759.6m due within 12 months, and liabilities of CN¥60.9m due beyond 12 months. On the other hand, it had cash of CN¥1.59b and CN¥192.1m worth of receivables due within a year. So it can boast CN¥961.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Namchow Food Group (Shanghai) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Namchow Food Group (Shanghai) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Namchow Food Group (Shanghai) has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Namchow Food Group (Shanghai) 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Namchow Food Group (Shanghai) 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, Namchow Food Group (Shanghai) produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Namchow Food Group (Shanghai) has net cash of CN¥1.34b, as well as more liquid assets than liabilities. And we liked the look of last year's 77% year-on-year EBIT growth. So we don't think Namchow Food Group (Shanghai)'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. For example Namchow Food Group (Shanghai) has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.