David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Ningbo Yunsheng Co., Ltd. (SHSE:600366) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Ningbo Yunsheng Carry?

As you can see below, at the end of March 2024, Ningbo Yunsheng had CN¥1.57b of debt, up from CN¥1.11b a year ago. Click the image for more detail. However, it does have CN¥2.00b in cash offsetting this, leading to net cash of CN¥430.3m.

How Healthy Is Ningbo Yunsheng's Balance Sheet?

The latest balance sheet data shows that Ningbo Yunsheng had liabilities of CN¥1.93b due within a year, and liabilities of CN¥982.8m falling due after that. On the other hand, it had cash of CN¥2.00b and CN¥2.29b worth of receivables due within a year. So it can boast CN¥1.37b more liquid assets than total liabilities.

This surplus suggests that Ningbo Yunsheng is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ningbo Yunsheng boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ningbo Yunsheng 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.

In the last year Ningbo Yunsheng had a loss before interest and tax, and actually shrunk its revenue by 25%, to CN¥5.0b. To be frank that doesn't bode well.

So How Risky Is Ningbo Yunsheng?

While Ningbo Yunsheng lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥1.0b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Ningbo Yunsheng .

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.

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