Xinxiang Richful Lube AdditiveLtd (SZSE:300910) Has A Rock Solid Balance Sheet

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.' 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 Xinxiang Richful Lube Additive Co.,Ltd. (SZSE:300910) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Xinxiang Richful Lube AdditiveLtd

What Is Xinxiang Richful Lube AdditiveLtd's Net Debt?

As you can see below, at the end of September 2023, Xinxiang Richful Lube AdditiveLtd had CN¥68.6m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.59b in cash, so it actually has CN¥1.52b net cash.

How Healthy Is Xinxiang Richful Lube AdditiveLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xinxiang Richful Lube AdditiveLtd had liabilities of CN¥422.8m due within 12 months and liabilities of CN¥80.8m due beyond that. Offsetting this, it had CN¥1.59b in cash and CN¥324.6m in receivables that were due within 12 months. So it actually has CN¥1.41b more liquid assets than total liabilities.

This short term liquidity is a sign that Xinxiang Richful Lube AdditiveLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xinxiang Richful Lube AdditiveLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Xinxiang Richful Lube AdditiveLtd grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. 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 Xinxiang Richful Lube AdditiveLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Xinxiang Richful Lube AdditiveLtd 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, Xinxiang Richful Lube AdditiveLtd's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xinxiang Richful Lube AdditiveLtd has CN¥1.52b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 88% over the last year. So we don't think Xinxiang Richful Lube AdditiveLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Xinxiang Richful Lube AdditiveLtd (at least 1 which is potentially serious) , 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.