We Think Qifeng New Material (SZSE:002521) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Qifeng New Material Co., Ltd. (SZSE:002521) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Qifeng New Material

How Much Debt Does Qifeng New Material Carry?

As you can see below, Qifeng New Material had CN¥541.9m of debt at March 2024, down from CN¥600.6m a year prior. But it also has CN¥906.1m in cash to offset that, meaning it has CN¥364.2m net cash.

How Healthy Is Qifeng New Material's Balance Sheet?

The latest balance sheet data shows that Qifeng New Material had liabilities of CN¥1.37b due within a year, and liabilities of CN¥12.3m falling due after that. On the other hand, it had cash of CN¥906.1m and CN¥1.45b worth of receivables due within a year. So it actually has CN¥973.0m more liquid assets than total liabilities.

It's good to see that Qifeng New Material has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Qifeng New Material boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Qifeng New Material turned things around in the last 12 months, delivering and EBIT of CN¥350m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Qifeng New Material 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 company can only pay off debt with cold hard cash, not accounting profits. Qifeng New Material 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 year, Qifeng New Material recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qifeng New Material has net cash of CN¥364.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥336m, being 96% of its EBIT. So we don't think Qifeng New Material'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. We've identified 1 warning sign with Qifeng New Material , and understanding them should be part of your investment process.

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.