Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies NAURA Technology Group Co., Ltd. (SZSE:002371) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 NAURA Technology Group Carry?
As you can see below, at the end of June 2024, NAURA Technology Group had CN¥5.83b of debt, up from CN¥5.35b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥12.0b in cash, so it actually has CN¥6.13b net cash.
A Look At NAURA Technology Group's Liabilities
We can see from the most recent balance sheet that NAURA Technology Group had liabilities of CN¥22.5b falling due within a year, and liabilities of CN¥9.61b due beyond that. On the other hand, it had cash of CN¥12.0b and CN¥7.06b worth of receivables due within a year. So its liabilities total CN¥13.1b more than the combination of its cash and short-term receivables.
Of course, NAURA Technology Group has a titanic market capitalization of CN¥194.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, NAURA Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that NAURA Technology Group has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NAURA Technology Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NAURA Technology Group 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, NAURA Technology Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
We could understand if investors are concerned about NAURA Technology Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.13b. And we liked the look of last year's 44% year-on-year EBIT growth. So we don't have any problem with NAURA Technology Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with NAURA Technology Group .
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
