Does Ruijie Networks (SZSE:301165) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ruijie Networks Co., Ltd. (SZSE:301165) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Ruijie Networks

How Much Debt Does Ruijie Networks Carry?

As you can see below, at the end of December 2023, Ruijie Networks had CN¥692.0m of debt, up from CN¥580.5m a year ago. Click the image for more detail. But it also has CN¥2.30b in cash to offset that, meaning it has CN¥1.61b net cash.

How Strong Is Ruijie Networks' Balance Sheet?

According to the last reported balance sheet, Ruijie Networks had liabilities of CN¥3.89b due within 12 months, and liabilities of CN¥187.2m due beyond 12 months. Offsetting this, it had CN¥2.30b in cash and CN¥1.42b in receivables that were due within 12 months. So it has liabilities totalling CN¥359.2m more than its cash and near-term receivables, combined.

Having regard to Ruijie Networks' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥21.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Ruijie Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Ruijie Networks if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ruijie Networks'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, a company can only pay off debt with cold hard cash, not accounting profits. Ruijie Networks 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. During the last three years, Ruijie Networks generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Ruijie Networks's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.61b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in CN¥558m. So we are not troubled with Ruijie Networks'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. Be aware that Ruijie Networks is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.