Ningbo Runhe High-Tech Materials (SZSE:300727) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Ningbo Runhe High-Tech Materials Co., Ltd. (SZSE:300727) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ningbo Runhe High-Tech Materials

How Much Debt Does Ningbo Runhe High-Tech Materials Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Ningbo Runhe High-Tech Materials had debt of CN¥257.8m, up from CN¥245.5m in one year. But on the other hand it also has CN¥436.7m in cash, leading to a CN¥178.9m net cash position.

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A Look At Ningbo Runhe High-Tech Materials' Liabilities

Zooming in on the latest balance sheet data, we can see that Ningbo Runhe High-Tech Materials had liabilities of CN¥468.8m due within 12 months and liabilities of CN¥275.0m due beyond that. Offsetting these obligations, it had cash of CN¥436.7m as well as receivables valued at CN¥546.0m due within 12 months. So it can boast CN¥238.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Ningbo Runhe High-Tech Materials could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ningbo Runhe High-Tech Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Ningbo Runhe High-Tech Materials grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ningbo Runhe High-Tech Materials 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, a company can only pay off debt with cold hard cash, not accounting profits. Ningbo Runhe High-Tech Materials 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. Looking at the most recent three years, Ningbo Runhe High-Tech Materials recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo Runhe High-Tech Materials has net cash of CN¥178.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So we don't think Ningbo Runhe High-Tech Materials's use of debt is risky. 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. For example - Ningbo Runhe High-Tech Materials has 1 warning sign we think you should be aware of.

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.