Nanjing Hanrui CobaltLtd (SZSE:300618) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nanjing Hanrui Cobalt Co.,Ltd. (SZSE:300618) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nanjing Hanrui CobaltLtd

What Is Nanjing Hanrui CobaltLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Nanjing Hanrui CobaltLtd had CN¥1.53b of debt, an increase on CN¥1.07b, over one year. However, its balance sheet shows it holds CN¥2.11b in cash, so it actually has CN¥584.7m net cash.

How Healthy Is Nanjing Hanrui CobaltLtd's Balance Sheet?

According to the last reported balance sheet, Nanjing Hanrui CobaltLtd had liabilities of CN¥3.07b due within 12 months, and liabilities of CN¥353.2m due beyond 12 months. On the other hand, it had cash of CN¥2.11b and CN¥591.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥717.1m.

Since publicly traded Nanjing Hanrui CobaltLtd shares are worth a total of CN¥10.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nanjing Hanrui CobaltLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Nanjing Hanrui CobaltLtd grew its EBIT by 111% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nanjing Hanrui CobaltLtd 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. 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. In the last three years, Nanjing Hanrui CobaltLtd's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Nanjing Hanrui CobaltLtd has CN¥584.7m in net cash. And it impressed us with its EBIT growth of 111% over the last year. So we don't think Nanjing Hanrui CobaltLtd's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Nanjing Hanrui CobaltLtd's earnings per share history for free.

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.