Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Nanjing Quanxin Cable Technology Co., Ltd. (SZSE:300447) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Nanjing Quanxin Cable Technology

What Is Nanjing Quanxin Cable Technology's Debt?

The image below, which you can click on for greater detail, shows that Nanjing Quanxin Cable Technology had debt of CN¥81.0m at the end of June 2023, a reduction from CN¥196.0m over a year. However, its balance sheet shows it holds CN¥252.1m in cash, so it actually has CN¥171.1m net cash.

How Healthy Is Nanjing Quanxin Cable Technology's Balance Sheet?

We can see from the most recent balance sheet that Nanjing Quanxin Cable Technology had liabilities of CN¥784.4m falling due within a year, and liabilities of CN¥16.9m due beyond that. On the other hand, it had cash of CN¥252.1m and CN¥1.22b worth of receivables due within a year. So it actually has CN¥671.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Nanjing Quanxin Cable Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nanjing Quanxin Cable Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

While Nanjing Quanxin Cable Technology doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is Nanjing Quanxin Cable Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nanjing Quanxin Cable Technology 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, Nanjing Quanxin Cable Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nanjing Quanxin Cable Technology has net cash of CN¥171.1m, as well as more liquid assets than liabilities. So we are not troubled with Nanjing Quanxin Cable Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Nanjing Quanxin Cable Technology, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.