Is Ningbo Yongxin OpticsLtd (SHSE:603297) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ningbo Yongxin Optics Co.,Ltd (SHSE:603297) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ningbo Yongxin OpticsLtd

What Is Ningbo Yongxin OpticsLtd's Debt?

As you can see below, Ningbo Yongxin OpticsLtd had CN¥40.4m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥939.8m in cash offsetting this, leading to net cash of CN¥899.4m.

How Strong Is Ningbo Yongxin OpticsLtd's Balance Sheet?

We can see from the most recent balance sheet that Ningbo Yongxin OpticsLtd had liabilities of CN¥214.0m falling due within a year, and liabilities of CN¥26.6m due beyond that. On the other hand, it had cash of CN¥939.8m and CN¥230.2m worth of receivables due within a year. So it can boast CN¥929.4m more liquid assets than total liabilities.

This surplus suggests that Ningbo Yongxin OpticsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ningbo Yongxin OpticsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Ningbo Yongxin OpticsLtd's load is not too heavy, because its EBIT was down 25% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Ningbo Yongxin OpticsLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ningbo Yongxin OpticsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Ningbo Yongxin OpticsLtd recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo Yongxin OpticsLtd has net cash of CN¥899.4m, as well as more liquid assets than liabilities. So we are not troubled with Ningbo Yongxin OpticsLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ningbo Yongxin OpticsLtd is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

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.