Ningbo Yongxin OpticsLtd (SHSE:603297) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. As with many other companies Ningbo Yongxin Optics Co.,Ltd (SHSE:603297) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ningbo Yongxin OpticsLtd

How Much Debt Does Ningbo Yongxin OpticsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ningbo Yongxin OpticsLtd had CN¥146.4m of debt, an increase on CN¥40.7m, over one year. However, its balance sheet shows it holds CN¥1.02b in cash, so it actually has CN¥874.0m net cash.

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¥330.7m falling due within a year, and liabilities of CN¥22.3m due beyond that. Offsetting this, it had CN¥1.02b in cash and CN¥233.6m in receivables that were due within 12 months. So it can boast CN¥901.0m 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 33% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Yongxin OpticsLtd'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.

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. In the last three years, Ningbo Yongxin OpticsLtd's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ningbo Yongxin OpticsLtd has CN¥874.0m in net cash and a decent-looking balance sheet. So we are not troubled with Ningbo Yongxin OpticsLtd'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 instance, we've identified 3 warning signs for Ningbo Yongxin OpticsLtd that 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.

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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.