Is NavInfo (SZSE:002405) Using Too Much Debt?

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 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. As with many other companies NavInfo Co., Ltd. (SZSE:002405) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NavInfo

What Is NavInfo's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 NavInfo had debt of CN¥356.0m, up from CN¥218.7m in one year. But it also has CN¥2.73b in cash to offset that, meaning it has CN¥2.37b net cash.

A Look At NavInfo's Liabilities

We can see from the most recent balance sheet that NavInfo had liabilities of CN¥2.09b falling due within a year, and liabilities of CN¥250.4m due beyond that. Offsetting this, it had CN¥2.73b in cash and CN¥1.20b in receivables that were due within 12 months. So it can boast CN¥1.58b 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, NavInfo made a loss at the EBIT level, and saw its revenue drop to CN¥3.3b, which is a fall of 7.1%. That's not what we would hope to see.

So How Risky Is NavInfo?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that NavInfo had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥610m of cash and made a loss of CN¥1.3b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.37b. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 1 warning sign we've spotted with NavInfo .

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.