Inner Mongolia OJing Science & Technology (SZSE:001269) Has A Somewhat Strained 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Inner Mongolia OJing Science & Technology Co., Ltd. (SZSE:001269) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Inner Mongolia OJing Science & Technology

What Is Inner Mongolia OJing Science & Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Inner Mongolia OJing Science & Technology had CN¥707.0m of debt, an increase on CN¥97.5m, over one year. However, its balance sheet shows it holds CN¥875.5m in cash, so it actually has CN¥168.5m net cash.

How Strong Is Inner Mongolia OJing Science & Technology's Balance Sheet?

We can see from the most recent balance sheet that Inner Mongolia OJing Science & Technology had liabilities of CN¥1.02b falling due within a year, and liabilities of CN¥458.9m due beyond that. Offsetting these obligations, it had cash of CN¥875.5m as well as receivables valued at CN¥526.6m due within 12 months. So it has liabilities totalling CN¥72.2m more than its cash and near-term receivables, combined.

Having regard to Inner Mongolia OJing Science & Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.63b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Inner Mongolia OJing Science & Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Inner Mongolia OJing Science & Technology's saving grace is its low debt levels, because its EBIT has tanked 79% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Inner Mongolia OJing Science & Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Inner Mongolia OJing Science & Technology 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. Considering the last three years, Inner Mongolia OJing Science & Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Inner Mongolia OJing Science & Technology has CN¥168.5m in net cash. So while Inner Mongolia OJing Science & Technology does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Inner Mongolia OJing Science & Technology has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.