Xinxiang Richful Lube AdditiveLtd (SZSE:300910) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Xinxiang Richful Lube Additive Co.,Ltd. (SZSE:300910) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Xinxiang Richful Lube AdditiveLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Xinxiang Richful Lube AdditiveLtd had CN¥305.9m of debt, an increase on CN¥68.6m, over one year. But it also has CN¥1.22b in cash to offset that, meaning it has CN¥915.4m net cash.

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

According to the last reported balance sheet, Xinxiang Richful Lube AdditiveLtd had liabilities of CN¥686.7m due within 12 months, and liabilities of CN¥163.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.22b as well as receivables valued at CN¥560.7m due within 12 months. So it can boast CN¥932.2m 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. Succinctly put, Xinxiang Richful Lube AdditiveLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Xinxiang Richful Lube AdditiveLtd

While Xinxiang Richful Lube AdditiveLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 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. 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 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xinxiang Richful Lube AdditiveLtd has net cash of CN¥915.4m, as well as more liquid assets than liabilities. So we are not troubled with Xinxiang Richful Lube AdditiveLtd's debt use. 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 instance, we've identified 2 warning signs for Xinxiang Richful Lube AdditiveLtd (1 is concerning) you should be aware of.

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.