We Think Nongfu Spring (HKG:9633) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Nongfu Spring Co., Ltd. (HKG:9633) makes use of debt. But the real question is whether this debt is making the company risky.

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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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Nongfu Spring's Net Debt?

As you can see below, at the end of June 2025, Nongfu Spring had CN¥4.42b of debt, up from CN¥3.86b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥19.1b in cash, so it actually has CN¥14.7b net cash.

How Healthy Is Nongfu Spring's Balance Sheet?

We can see from the most recent balance sheet that Nongfu Spring had liabilities of CN¥32.1b falling due within a year, and liabilities of CN¥888.0m due beyond that. Offsetting this, it had CN¥19.1b in cash and CN¥835.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥13.0b more than its cash and near-term receivables, combined.

Since publicly traded Nongfu Spring shares are worth a very impressive total of CN¥520.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

See our latest analysis for Nongfu Spring

And we also note warmly that Nongfu Spring grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nongfu Spring can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Nongfu Spring has CN¥14.7b in net cash. And it also grew its EBIT by 11% over the last year. So we don't think Nongfu Spring's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Nongfu Spring, you may well want to click here to check an interactive graph of its earnings per share history.

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.