Does Ronglian Group (SZSE:002642) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ronglian Group Ltd. (SZSE:002642) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ronglian Group

How Much Debt Does Ronglian Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ronglian Group had CN¥340.3m of debt, an increase on CN¥315.8m, over one year. However, its balance sheet shows it holds CN¥367.0m in cash, so it actually has CN¥26.7m net cash.

How Healthy Is Ronglian Group's Balance Sheet?

According to the last reported balance sheet, Ronglian Group had liabilities of CN¥1.31b due within 12 months, and liabilities of CN¥18.9m due beyond 12 months. On the other hand, it had cash of CN¥367.0m and CN¥823.5m worth of receivables due within a year. So it has liabilities totalling CN¥136.1m more than its cash and near-term receivables, combined.

Given Ronglian Group has a market capitalization of CN¥5.73b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Ronglian Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ronglian Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ronglian Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 39%. To be frank that doesn't bode well.

So How Risky Is Ronglian Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Ronglian Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥127m and booked a CN¥174m accounting loss. But the saving grace is the CN¥26.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Ronglian Group's profit, revenue, and operating cashflow have changed over the last few years.

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.