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.' 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, NavInfo Co., Ltd. (SZSE:002405) does carry debt. But the real question is whether this debt is making the company risky.

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for NavInfo

How Much Debt Does NavInfo Carry?

As you can see below, at the end of September 2023, NavInfo had CN¥218.7m of debt, up from CN¥68.3m a year ago. Click the image for more detail. But it also has CN¥3.51b in cash to offset that, meaning it has CN¥3.29b net cash.

How Strong Is NavInfo's Balance Sheet?

According to the last reported balance sheet, NavInfo had liabilities of CN¥1.87b due within 12 months, and liabilities of CN¥291.9m due beyond 12 months. On the other hand, it had cash of CN¥3.51b and CN¥1.16b worth of receivables due within a year. So it actually has CN¥2.51b more liquid assets than total liabilities.

This short term liquidity is a sign that NavInfo could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NavInfo boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NavInfo'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.

Over 12 months, NavInfo reported revenue of CN¥3.6b, which is a gain of 9.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is NavInfo?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months NavInfo lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥915m and booked a CN¥772m accounting loss. Given it only has net cash of CN¥3.29b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how NavInfo's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.