These 4 Measures Indicate That Nanjing Hanrui CobaltLtd (SZSE:300618) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Nanjing Hanrui Cobalt Co.,Ltd. (SZSE:300618) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nanjing Hanrui CobaltLtd

What Is Nanjing Hanrui CobaltLtd's Net Debt?

As you can see below, at the end of June 2024, Nanjing Hanrui CobaltLtd had CN¥1.64b of debt, up from CN¥1.25b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.82b in cash, so it actually has CN¥177.6m net cash.

How Strong Is Nanjing Hanrui CobaltLtd's Balance Sheet?

We can see from the most recent balance sheet that Nanjing Hanrui CobaltLtd had liabilities of CN¥3.03b falling due within a year, and liabilities of CN¥351.4m due beyond that. On the other hand, it had cash of CN¥1.82b and CN¥574.4m worth of receivables due within a year. So its liabilities total CN¥991.7m more than the combination of its cash and short-term receivables.

Of course, Nanjing Hanrui CobaltLtd has a market capitalization of CN¥11.6b, so these liabilities are probably manageable. 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!

It was also good to see that despite losing money on the EBIT line last year, Nanjing Hanrui CobaltLtd turned things around in the last 12 months, delivering and EBIT of CN¥334m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nanjing Hanrui CobaltLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nanjing Hanrui CobaltLtd 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 year, Nanjing Hanrui CobaltLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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¥177.6m. So we don't have any problem with Nanjing Hanrui CobaltLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Nanjing Hanrui CobaltLtd , 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.