We Think Ningxia Building Materials GroupLtd (SHSE:600449) Can Stay On Top Of Its 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.' 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 Ningxia Building Materials Group Co.,Ltd (SHSE:600449) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ningxia Building Materials GroupLtd

What Is Ningxia Building Materials GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ningxia Building Materials GroupLtd had debt of CN¥931.6m, up from CN¥669.6m in one year. But it also has CN¥2.97b in cash to offset that, meaning it has CN¥2.04b net cash.

How Strong 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¥3.05b falling due within a year, and liabilities of CN¥564.3m due beyond that. Offsetting these obligations, it had cash of CN¥2.97b as well as receivables valued at CN¥2.41b due within 12 months. So it actually has CN¥1.76b 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.

In fact Ningxia Building Materials GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 67% in the last twelve months. 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. While Ningxia Building Materials GroupLtd 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, Ningxia Building Materials GroupLtd 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 it is always sensible to investigate a company's debt, in this case Ningxia Building Materials GroupLtd has CN¥2.04b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥398m, being 91% of its EBIT. So we don't think Ningxia Building Materials GroupLtd's use of debt is risky. 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. Be aware that Ningxia Building Materials GroupLtd is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.