Is Ningbo Exciton Technology (SZSE:300566) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Ningbo Exciton Technology Co., Ltd. (SZSE:300566) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ningbo Exciton Technology

What Is Ningbo Exciton Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Ningbo Exciton Technology had debt of CN¥738.5m at the end of June 2024, a reduction from CN¥909.3m over a year. But it also has CN¥739.2m in cash to offset that, meaning it has CN¥747.4k net cash.

A Look At Ningbo Exciton Technology's Liabilities

The latest balance sheet data shows that Ningbo Exciton Technology had liabilities of CN¥1.50b due within a year, and liabilities of CN¥265.3m falling due after that. Offsetting this, it had CN¥739.2m in cash and CN¥1.02b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Ningbo Exciton Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.77b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Ningbo Exciton Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Ningbo Exciton Technology turned things around in the last 12 months, delivering and EBIT of CN¥190m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ningbo Exciton Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ningbo Exciton Technology 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. Happily for any shareholders, Ningbo Exciton Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Ningbo Exciton Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥747.4k. And it impressed us with free cash flow of CN¥241m, being 127% of its EBIT. So we don't think Ningbo Exciton Technology'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 1 warning sign we've spotted with Ningbo Exciton Technology .

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.