Is Ronglian Group (SZSE:002642) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ronglian Group Ltd. (SZSE:002642) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ronglian Group

What Is Ronglian Group's Debt?

The chart below, which you can click on for greater detail, shows that Ronglian Group had CN¥317.6m in debt in September 2023; about the same as the year before. However, it does have CN¥424.3m in cash offsetting this, leading to net cash of CN¥106.7m.

How Strong Is Ronglian Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ronglian Group had liabilities of CN¥1.35b due within 12 months and liabilities of CN¥20.6m due beyond that. On the other hand, it had cash of CN¥424.3m and CN¥966.4m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Ronglian Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Ronglian Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Ronglian Group had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥3.0b. That makes us nervous, to say the least.

So How Risky Is Ronglian Group?

While Ronglian Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥184m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Ronglian Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.