Ningxia Building Materials GroupLtd (SHSE:600449) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ningxia Building Materials Group Co.,Ltd (SHSE:600449) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ningxia Building Materials GroupLtd

What Is Ningxia Building Materials GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Ningxia Building Materials GroupLtd had CN¥1.17b of debt, an increase on CN¥781.4m, over one year. But it also has CN¥3.02b in cash to offset that, meaning it has CN¥1.85b net cash.

How Healthy Is Ningxia Building Materials GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Ningxia Building Materials GroupLtd had liabilities of CN¥3.21b falling due within a year, and liabilities of CN¥616.8m due beyond that. Offsetting this, it had CN¥3.02b in cash and CN¥2.28b in receivables that were due within 12 months. So it can boast CN¥1.47b more liquid assets than total liabilities.

This excess liquidity suggests that Ningxia Building Materials GroupLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Ningxia Building Materials GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Ningxia Building Materials GroupLtd if management cannot prevent a repeat of the 68% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ningxia Building Materials GroupLtd'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. Ningxia Building Materials GroupLtd 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. During the last three years, Ningxia Building Materials GroupLtd produced sturdy free cash flow equating to 77% 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 Ningxia Building Materials GroupLtd has net cash of CN¥1.85b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥907m, being 77% of its EBIT. So is Ningxia Building Materials GroupLtd's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Ningxia Building Materials GroupLtd you should know about.

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.