We Think Ruijie Networks (SZSE:301165) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Ruijie Networks Co., Ltd. (SZSE:301165) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ruijie Networks

What Is Ruijie Networks's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ruijie Networks had debt of CN¥1.30b, up from CN¥600.0m in one year. However, its balance sheet shows it holds CN¥1.64b in cash, so it actually has CN¥334.5m net cash.

How Strong Is Ruijie Networks' Balance Sheet?

We can see from the most recent balance sheet that Ruijie Networks had liabilities of CN¥4.64b falling due within a year, and liabilities of CN¥144.3m due beyond that. On the other hand, it had cash of CN¥1.64b and CN¥1.68b worth of receivables due within a year. So its liabilities total CN¥1.47b more than the combination of its cash and short-term receivables.

Since publicly traded Ruijie Networks shares are worth a total of CN¥50.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Ruijie Networks boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Ruijie Networks grew its EBIT by 374% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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'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. 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 burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Ruijie Networks has CN¥334.5m in net cash. And it impressed us with its EBIT growth of 374% over the last year. So we don't have any problem with Ruijie Networks's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Ruijie Networks you should be aware of, and 2 of them can't be ignored.

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.

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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.