These 4 Measures Indicate That Ningbo Sunrise Elc TechnologyLtd (SZSE:002937) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Ningbo Sunrise Elc Technology Co.,Ltd (SZSE:002937) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ningbo Sunrise Elc TechnologyLtd

What Is Ningbo Sunrise Elc TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Ningbo Sunrise Elc TechnologyLtd had CN¥380.2m of debt, an increase on CN¥30.0m, over one year. But on the other hand it also has CN¥859.3m in cash, leading to a CN¥479.1m net cash position.

A Look At Ningbo Sunrise Elc TechnologyLtd's Liabilities

The latest balance sheet data shows that Ningbo Sunrise Elc TechnologyLtd had liabilities of CN¥508.8m due within a year, and liabilities of CN¥409.0m falling due after that. Offsetting this, it had CN¥859.3m in cash and CN¥470.3m in receivables that were due within 12 months. So it can boast CN¥411.8m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Ningbo Sunrise Elc TechnologyLtd has boosted its EBIT by 82%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ningbo Sunrise Elc TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ningbo Sunrise Elc TechnologyLtd 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 most recent three years, Ningbo Sunrise Elc TechnologyLtd recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ningbo Sunrise Elc TechnologyLtd has CN¥479.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 82% over the last year. So we don't think Ningbo Sunrise Elc TechnologyLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Ningbo Sunrise Elc TechnologyLtd 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.