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. Importantly, Ningxia Building Materials Group Co.,Ltd (SHSE:600449) 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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Ningxia Building Materials GroupLtd Carry?

As you can see below, at the end of September 2024, Ningxia Building Materials GroupLtd had CN¥931.6m of debt, up from CN¥669.6m a year ago. Click the image for more detail. However, it does have CN¥2.97b in cash offsetting this, leading to net cash of CN¥2.04b.

How Healthy Is Ningxia Building Materials GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningxia Building Materials GroupLtd had liabilities of CN¥3.05b due within 12 months and liabilities of CN¥564.3m due beyond that. On the other hand, it had cash of CN¥2.97b and CN¥2.41b worth of receivables due within a year. So it can boast CN¥1.76b more liquid assets than total liabilities.

It's good to see that Ningxia Building Materials GroupLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ningxia Building Materials GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Ningxia Building Materials GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 67% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ningxia Building Materials GroupLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ningxia Building Materials GroupLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Ningxia Building Materials GroupLtd generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningxia Building Materials GroupLtd has net cash of CN¥2.04b, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in CN¥398m. So is Ningxia Building Materials GroupLtd's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Ningxia Building Materials GroupLtd , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.