Does Foshan NationStar OptoelectronicsLtd (SZSE:002449) Have A Healthy Balance Sheet?

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. We can see that Foshan NationStar Optoelectronics Co.,Ltd (SZSE:002449) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Foshan NationStar OptoelectronicsLtd

What Is Foshan NationStar OptoelectronicsLtd's Net Debt?

As you can see below, at the end of March 2024, Foshan NationStar OptoelectronicsLtd had CN¥641.7m of debt, up from CN¥576.7m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.56b in cash, leading to a CN¥922.2m net cash position.

How Strong Is Foshan NationStar OptoelectronicsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Foshan NationStar OptoelectronicsLtd had liabilities of CN¥2.16b due within 12 months and liabilities of CN¥423.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.56b as well as receivables valued at CN¥1.49b due within 12 months. So it can boast CN¥468.0m more liquid assets than total liabilities.

This surplus suggests that Foshan NationStar OptoelectronicsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Foshan NationStar OptoelectronicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Foshan NationStar OptoelectronicsLtd's saving grace is its low debt levels, because its EBIT has tanked 94% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Foshan NationStar OptoelectronicsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Foshan NationStar OptoelectronicsLtd 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. Over the last three years, Foshan NationStar OptoelectronicsLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Foshan NationStar OptoelectronicsLtd has net cash of CN¥922.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in CN¥194m. So we don't have any problem with Foshan NationStar OptoelectronicsLtd's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Foshan NationStar OptoelectronicsLtd (including 1 which is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.