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. We note that Ningbo Fujia Industrial Co., Ltd. (SHSE:603219) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Ningbo Fujia Industrial Carry?

As you can see below, Ningbo Fujia Industrial had CN¥157.3m of debt at March 2024, down from CN¥184.1m a year prior. But it also has CN¥891.1m in cash to offset that, meaning it has CN¥733.7m net cash.

How Healthy Is Ningbo Fujia Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningbo Fujia Industrial had liabilities of CN¥921.8m due within 12 months and liabilities of CN¥33.1m due beyond that. On the other hand, it had cash of CN¥891.1m and CN¥503.3m worth of receivables due within a year. So it actually has CN¥439.5m more liquid assets than total liabilities.

This surplus suggests that Ningbo Fujia Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ningbo Fujia Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Ningbo Fujia Industrial saw its EBIT drop by 4.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ningbo Fujia Industrial's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ningbo Fujia Industrial 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. During the last three years, Ningbo Fujia Industrial produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ningbo Fujia Industrial has CN¥733.7m in net cash and a decent-looking balance sheet. So is Ningbo Fujia Industrial's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Ningbo Fujia Industrial you should be aware of.

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.

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