Is Ningbo Yunsheng (SHSE:600366) Using Too Much Debt?

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 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 Ningbo Yunsheng Co., Ltd. (SHSE:600366) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Ningbo Yunsheng

How Much Debt Does Ningbo Yunsheng Carry?

The image below, which you can click on for greater detail, shows that Ningbo Yunsheng had debt of CN¥1.88b at the end of September 2023, a reduction from CN¥1.97b over a year. However, it does have CN¥1.96b in cash offsetting this, leading to net cash of CN¥77.7m.

How Strong Is Ningbo Yunsheng's Balance Sheet?

The latest balance sheet data shows that Ningbo Yunsheng had liabilities of CN¥2.23b due within a year, and liabilities of CN¥923.5m falling due after that. Offsetting these obligations, it had cash of CN¥1.96b as well as receivables valued at CN¥2.31b due within 12 months. So it actually has CN¥1.12b more liquid assets than total liabilities.

It's good to see that Ningbo Yunsheng has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Ningbo Yunsheng 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 future earnings, more than anything, that will determine Ningbo Yunsheng's ability to maintain a healthy balance sheet going forward. 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 Ningbo Yunsheng had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥5.4b. We would much prefer see growth.

So How Risky Is Ningbo Yunsheng?

While Ningbo Yunsheng lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥506m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ningbo Yunsheng is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.