New Trend International Logis-TechLtd (SZSE:300532) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, New Trend International Logis-Tech Co.,Ltd. (SZSE:300532) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for New Trend International Logis-TechLtd

How Much Debt Does New Trend International Logis-TechLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 New Trend International Logis-TechLtd had CN¥61.7m of debt, an increase on CN¥37.6m, over one year. However, its balance sheet shows it holds CN¥844.1m in cash, so it actually has CN¥782.3m net cash.

How Healthy Is New Trend International Logis-TechLtd's Balance Sheet?

The latest balance sheet data shows that New Trend International Logis-TechLtd had liabilities of CN¥2.71b due within a year, and liabilities of CN¥84.7m falling due after that. Offsetting this, it had CN¥844.1m in cash and CN¥2.16b in receivables that were due within 12 months. So it can boast CN¥206.6m more liquid assets than total liabilities.

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

But the bad news is that New Trend International Logis-TechLtd has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is New Trend International Logis-TechLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While New Trend International Logis-TechLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, New Trend International Logis-TechLtd produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that New Trend International Logis-TechLtd has net cash of CN¥782.3m, as well as more liquid assets than liabilities. So we are not troubled with New Trend International Logis-TechLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - New Trend International Logis-TechLtd has 2 warning signs we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.