Does Nanjing Hanrui CobaltLtd (SZSE:300618) Have A Healthy Balance Sheet?

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.' 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. Importantly, Nanjing Hanrui Cobalt Co.,Ltd. (SZSE:300618) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nanjing Hanrui CobaltLtd

What Is Nanjing Hanrui CobaltLtd's Net Debt?

As you can see below, at the end of March 2024, Nanjing Hanrui CobaltLtd had CN¥1.63b of debt, up from CN¥1.31b a year ago. Click the image for more detail. However, it does have CN¥1.80b in cash offsetting this, leading to net cash of CN¥172.8m.

How Healthy Is Nanjing Hanrui CobaltLtd's Balance Sheet?

According to the last reported balance sheet, Nanjing Hanrui CobaltLtd had liabilities of CN¥2.33b due within 12 months, and liabilities of CN¥540.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.80b as well as receivables valued at CN¥507.6m due within 12 months. So its liabilities total CN¥562.3m more than the combination of its cash and short-term receivables.

Since publicly traded Nanjing Hanrui CobaltLtd shares are worth a total of CN¥7.97b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Nanjing Hanrui CobaltLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Nanjing Hanrui CobaltLtd grew its EBIT by 348% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Nanjing Hanrui CobaltLtd can strengthen its balance sheet over time. 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. Nanjing Hanrui CobaltLtd 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 three years, Nanjing Hanrui CobaltLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Nanjing Hanrui CobaltLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥172.8m. And it impressed us with its EBIT growth of 348% over the last year. So we are not troubled with Nanjing Hanrui CobaltLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Nanjing Hanrui CobaltLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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