Is Nongfu Spring (HKG:9633) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Nongfu Spring Co., Ltd. (HKG:9633) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Nongfu Spring

How Much Debt Does Nongfu Spring Carry?

The chart below, which you can click on for greater detail, shows that Nongfu Spring had CN¥3.86b in debt in June 2024; about the same as the year before. However, it does have CN¥19.0b in cash offsetting this, leading to net cash of CN¥15.2b.

A Look At Nongfu Spring's Liabilities

We can see from the most recent balance sheet that Nongfu Spring had liabilities of CN¥29.0b falling due within a year, and liabilities of CN¥671.2m due beyond that. Offsetting these obligations, it had cash of CN¥19.0b as well as receivables valued at CN¥703.2m due within 12 months. So its liabilities total CN¥9.93b more than the combination of its cash and short-term receivables.

Since publicly traded Nongfu Spring shares are worth a very impressive total of CN¥317.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Nongfu Spring also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Nongfu Spring grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 Nongfu Spring'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. Nongfu Spring 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, Nongfu Spring recorded free cash flow worth 78% 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

We could understand if investors are concerned about Nongfu Spring's liabilities, but we can be reassured by the fact it has has net cash of CN¥15.2b. And it impressed us with its EBIT growth of 34% over the last year. So we don't think Nongfu Spring's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Nongfu Spring you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.