Is NavInfo (SZSE:002405) Using Debt Sensibly?

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.' 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 can see that NavInfo Co., Ltd. (SZSE:002405) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NavInfo

What Is NavInfo's Net Debt?

As you can see below, at the end of March 2024, NavInfo had CN¥407.8m of debt, up from CN¥132.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.09b in cash, so it actually has CN¥2.68b net cash.

How Healthy Is NavInfo's Balance Sheet?

We can see from the most recent balance sheet that NavInfo had liabilities of CN¥2.01b falling due within a year, and liabilities of CN¥219.0m due beyond that. Offsetting this, it had CN¥3.09b in cash and CN¥1.15b in receivables that were due within 12 months. So it actually has CN¥2.00b more liquid assets than total liabilities.

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

In the last year NavInfo had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to CN¥3.1b. That's not what we would hope to see.

So How Risky Is NavInfo?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NavInfo lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥578m and booked a CN¥1.4b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.68b. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 1 warning sign for NavInfo 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.