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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Xinxiang Richful Lube Additive Co.,Ltd. (SZSE:300910) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Xinxiang Richful Lube AdditiveLtd

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 Healthy Is Xinxiang Richful Lube AdditiveLtd's Balance Sheet?

The latest balance sheet data shows that Xinxiang Richful Lube AdditiveLtd had liabilities of CN¥686.7m due within a year, and liabilities of CN¥163.0m falling due after that. On the other hand, it had cash of CN¥1.22b and CN¥560.7m worth of receivables due within a year. So it actually has 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!

Xinxiang Richful Lube AdditiveLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xinxiang Richful Lube AdditiveLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Xinxiang Richful Lube AdditiveLtd 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. 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. Be aware that Xinxiang Richful Lube AdditiveLtd is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.